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THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 


HENRY  RAND  HATFIELD 
MEMORIAL  COLLECTION 

PRESENTED  BY 

FRIENDS  IN  THE  ACCOUNTING 
PROFESSION 


Principles  of  Accountancy 


American 
Bookkeeping  Series 


BY 

LLOYD  E.  GOODYEAR 


Author  of  Progressive  Business  Accounting,  Bank  Accounting,  Farm  Accounting, 

and  Certain  Sets  in  the  American  Bookkeeping  Series.    Joint  Author  of 

Commission,  Real  Estate  and  Insurance,  Railroading,  Corporation, 

Manufacturing  and  Wholesaling  Sets  of  Goodyear's 

Higher  Accounting,  New  Inductive 

Bookkeeping,  Etc. 


GOODYEAR-MARSHALL  PUBLISHING  Co. 
CEDAR  RAPIDS,  IOWA 


COPYRIGHT,  1913,  BY 

GOODYEAR-MARSHALL  PUBLISHING  CO. 
CEDAR  RAPIDS,  IOWA 


Preface 

Several  considerations  prompted. in  the  publication 
of  this  book.  To  begin  with,  it  has  long  appeared  that 
the  governing  principles  of  accountancy — which  in  most 
bookkeeping  texts  are  scattered  about  with  other  matter 
in  various  parts  of  the  books — could  be  gathered  in  one 
volume,  and  topically  labeled  and  indexed,  for  the  con- 
venience both  of  the  student  and  of  the  bookkeeper.  To 
thus  arrange  the  essential  principles  within  the  limits  of 
a  book  of  less  than  two  hundred  pages,  has  been  a 
lengthy  and  perplexing,  but  on  the  whole,  a  satisfactory 
task.  It  is  believed,  with  this  book,  that  a  student  may 
refer  as  readily  to  any  governing  principle  of  account- 
ancy, as  a  bookkeeper  may  refer  to  a  ledger  account. 

Again,  the  study  of  bookkeeping — though  of  great 
practical  importance  under  any  conditions — can  be  made 
much  more  direct  in  its  application,  by  the  selection  of 
practical  sets,  based  upon  the  kinds  of  business  or  in- 
dustry prevalent  in  the  locality  where  the  subject  is 
taught,  or  that  may  be  of  personal  interest  to  the  student. 

Having  placed  the  principles  of  accountancy  in  a 
small  separate  volume,  we  are  enabled  to  prepare,  by  the 
unit  plan,  practice  sets  that  severally  afford  a  business 
routine  which  will  directly  familiarize  the  student  with 
the  commodities,  processes,  and  trade  conditions  prevail- 
ing in  any  one  of  the  hundred  or  more  classified  lines  of 
business  or  organized  interests.  These  units  are  graded, 
and  can  be  selected  from  "The  American  Bookkeeping 
Series,"  for  which  this  book  is  the  reference  in  account- 
ancy matters. 

The  division  of  bookkeeping  sets  into  graded  units, 
based  on  the  principles  of  accountancy,  has  another  ad- 
vantage. Under  some  local  conditions,  or  at  certain 
stages  of  progress  in  the  same  class-room,  problem  work, 
without  business  papers,  is  preferable.  Under  other  con- 
ditions or  at  other  times,  work  with  outgoing  and  in- 
coming papers  is  better.  Furthermore,  there  are  few 


4  VREFACE 

classes  that  should  not  have  at  least  one  unit  of  true  busi- 
ness practice.  Units  constructed  to  accord  with  these 
needs  can  be  selected  from  The  American  Bookkeeping 
Series,  in  their  proper  sequence,  and  without  waste  of 
time  or  material. 

It  is  quite  well  established  that  students,  especially 
immature  students,  have  often  had  to  work  at  a  great  dis- 
advantage, and  have  been  subjected  to  injurious  eye- 
strain  as  well,  by  reason  of  certain  mechanical  defects  in 
the  text  books  placed  in  their  hands.  Two  improvements 
in  the  make  up  of  a  bookkeeping  text  may  be  noted  here : 

(1)  The  reading  line  in  a  text  book  should,  not  be 
over  four  and  one-half  inches  in  length.     In  a  book  for 
close  study,  three  and  one-half  inches  is  better.     In  this 
book,  which  is  to  be  studied  closely,  we  adopted  three  and 
five-eighths  inches.     In  the  accompanying  series  of  book- 
keeping units,  we  adopted  four  and  one-half  inches. 

(2)  It  seems  that  the  illustrated  forms  of  books  of 
entry  and  account   are    examined   and   studied  to  much 
greater  advantage,  if  the  forms  themselves  are  of  full 
commercial   size,   making   apparent   all   details   in   their 
proper  surroundings.     In  many  bookkeeping  texts,   the 
attempt  to  make  a  short  reading  line,  together  with  illus- 
trated forms  of  reasonable  size,  printed  in  the  same  book, 
has  resulted  in  an  unhappy  compromise — the  reading  line 
being  altogether  too  long,  and  the  illustrations  uncom- 
fortably cramped  and  inadequate.     In  this  book  of  prin- 
ciples, no  illustrated  forms  are  given;  but  there  are  con- 
stant references  to  a  "Book  of  Forms, "  which  supplies, 
under  separate  cover,  a  classified  series  of  all  forms  under 
consideration. 

We  call  attention  to  the  "Index-Commentary," 
which  provides,  in  a  single  alphabetical  list,  an  index  to 
topics  and  to  model  forms,  a  vocabulary  of  business  terms 
and  words,  the  standard  abbreviations,  and  the  working 
rules.  The  star  (*)  placed  before  words  found  in  the 
body  of  the  work,  is  to  call  attention  to  fuller  discussion 
or  definition  in  the  Index-Commentary. 


PREFACE  5 

It  is  hoped  that  this  book  may  be  found  useful  to 
the  business  man,  who  needs  a  reliable,  constructive  guide 
when  planning  or  overseeing  his  accounting  records;  to 
the  bookkeeper,  who  will  find  it  a  convenient  reference 
as  to  bookkeeping  or  office  problems,  as  well  as  to  the 
student  of  any  modern  bookkeeping  course,  who  will,  in 
The  Principles  of  Accountancy,  find  an  excellent  supple- 
mentary reference  text  at  all  stages  of  his  work.  The 
student  who  works  out  the  several  units  of  The  American 
Bookkeeping  Series,  will. find  The  Principles  of  Account- 
ancy indispensable. 

Whatever  credit  may  be  due  for  the  production  of  a 
work  of  this  kind,  should  not  be  ascribed  wholly  to  the 
author  of  the  book.  The  growth  of  accountancy  science 
is  co-incident  with  the  advance  in  co-operation  and  or- 
ganization. For  this,  we  are  debtors  to  the  Jew  and  the 
Greek,  to  the  Roman  and  the  Continental,  to  the  English- 
man and  the  American.  In  this  small  volume,  it  is  im- 
practicable to  mention  the  many  leaders  in  the  profession 
whose  works  the  author  has  consulted  freely.  To  men- 
tion the  names  of  a  dozen  leading  accountants,  would 
bring  to  mind  a  score  of  others  that  had  been  overlooked. 
Yet  the  author  could  not  make  this  attempt  to  crystallize 
the  mass  of  current  accountancy  authority — frequently 
diffuse,  inconsistent,  and  even  conflicting — without  draw- 
ing upon  his  own  stock  of  practical  conservatism,  gath- 
ered through  years  of  service  at  the  bookkeeper's  desk. 

Without  question,  advancement  in  the  science  of  ac- 
countancy will  necessitate  some  modifications  in  certain 
details  of  the  following  pages.  Yet  the  form  and  arrange- 
ment of  this  book  appear  to  us  to  be  of  a  permanent 
nature.  We  shall  appreciate  any  criticisms  from  either 
student,  bookkeeper,  accountant,  or  teacher,  that  may 
tend  to  make  The  Principles  of  Accountancy  a  more  use- 
ful guide  for  all. 


TABLE  OF  CONTEXTS 


ACCOUNTING :                                                     Principles  Pages 

Introductory  Definitions   1-10  7-  11 

Financial  Statements 11-20  11-  20 

Financial  Ledger   21-40  20-  49 

Real  Accounts — Asset  21-30  20-  38 

—Liability    31^0  38-  49 

Profit  and  Loss  Statements 41-50  49-  59 

Business  Ledger  • 51-60  59-  71 

Nominal  Accounts   51-60  59-  72 

AUDITING : 

In  General   61-62  E  72-  74 

For  Accuracy  63-63  D  74-  77 

For  True  Record  64-64  B  77-  81 

For  Fraud  65-65  E  81-  86 

For  Suitable  Books  and  Records 66  87-  88 

For  Worth  and  Earning  Power 67-67  C  88-  90 

Legal  Aspects   68-68  K  90-104 

Single  Entry   69-69  G  104-107 

Report   70  107-108 

BOOKKEEPING : 

Original  Entries  71-71  H  108-112 

Charge  and  Credit 71 1-71  R      112-117 

The  Ledger  72-72  S  117-128 

The  Journal  73-73  G  128-134 

The  Cash  Book 74-74  H  134-144 

The  Merchandise  Sold  Book 75-T-",  1 :  144-148 

The  Merchandise  Bought  Book 76-76  D  148-152 

The  Inventory  Book 77-77  D  153-154 

Primary  Books   78  ir.J-156 

Auxiliary  Books : 79  156-158 

Business  Forms   80-80  C  158-167 

Filing    81  167-168 

INDEX-COMMENTARY  ..169-end 


INTRODUCTORY  DEFINITIONS    (1-10)  7 

Accountancy  is  the  branch  of  mathematical  science 
that  treats  of  the  relations  of  values  expressible  in  terms 
of  money.  It  is  useful  in  discovering  the  causes  of  suc- 
cess and  failure  in  business.  The  principles  of  account- 
ancy are  applied  to  business  concerns  in  three  divisions  of 
practical  art,  named  accounting,  bookkeeping,  and 
auditing. 

1.  Accounting   is   the    art    of   exhibiting   the   com- 
ponent parts  of  a  business  Organization  through  their 
expression  in  accounts,  which  are  formed,  continued  and 
closed  in  accordance  with  a  body  of  governing  principles 
outlined    in    the    course    of    centuries    of    progress    in 
accountancy. 

An  accountant  arranges  and  prepares  a  bookkeeping 
system  adapted  to  the  needs  of  a  given  business,  and  de- 
rives from  the  system  an  accumulation  of  guiding  facts, 
for  the  benefit  of  the  business  organization.  He  is  the 
architect  of  the  bookkeeping  structure. 

2.  Bookkeeping   is   the    art   of   recording   business 
transactions  and  operations. 

There  are  two  principal  phases  of  bookkeeping:  (1) 
the  preservation  of  a  true  business  history  of  some  cer- 
tain *concern;  (2)  the  classification  of  the  items  recorded 
in  such  a  way  as  to  show  the  receipts  and  disbursements 
of  cash,  and  the  cost  and  yield  of  the  other  component 
parts  of  the  given  concern. 

'  A  bookkeeper,  as  such,  should  know:  (1)  how  to 
record  all  transactions  that  occur  in  a  given  business; 
(2)  how  to  post  all  entries  to  the  proper  accounts;  (3) 
how  to  show  the  condition  of  any  account,  by  means  of 
a  statement;  (4)  how  to  verify  his  work  by  a  trial  bal- 
ance; (5)  how  to  preserve  *  vouchers  relating  to  his 
records. 

3.  Auditing  is  the  art  of  examining  books,  records, 
accounts  and  the  business  interests  with  a  view  to  dis- 
covering the  actual  conditions. 

An  auditor  is  employed,  ordinarily,  (1)  to  detect 
fraud;  (2)  to  prove  the  mechanical  and  mathematical 


8  INTRODUCTORY  DEFINITIONS   (1-10) 

accuracy  of  books;  (3)  to  discover  points  in  which  the 
books  do  not  conform  with  the  principles  of  account- 
ancy; (4)  to  exhibit  the  true  condition  of  a  business; 
(5)  to  make  recommendations  with  a  view  to  improve- 
ment. 

4.  Business,   in  the   commercial   sense  of  the  term, 
means  the  various  processes  by  which  *utilities  are  ex- 
changed  or   otherwise   operated   upon,   with   a   view   to 
profit. 

A  private  business  organization  is  formed  for  the 
purpose  of  buying  or  securing  certain  utilities,  combining 
these  into  a  new  utility,  and  selling  the  utility  thus  pro- 
duced. Organizations  for  the  transaction  of  public 
business  render  various  services  to  the  public,  and  are 
maintained  from  the  collection  of  *revenues. 

A  business  man  must  be  guided  in  his  transactions 
and  operations  by  his  books  of  record  and  account,  if  he 
would  attain  to  business  success.  As  a  rule,  the  more 
profitable  a  business  is,  the  more  complicated  are  its 
processes  that  demand  constant  reference  to  records. 
With  the  advance  of  civilization,  business  becomes  in- 
creasingly dependent  upon  accountancy. 

Every  business  man  should  know  enough  about 
accountancy,  bookkeeping  and  auditing,  to  construct  a 
useful  account  analysis,  to  make  or  oversee  the  making 
of  good  records,  and  to  devise- an  adequate  proof  of  the 
reliability  of  his  own  books.  He  should  also  be  able, 
when  called  upon,  to  take  charge  of  the  *finances  of  a 
society,  church,  school  district,  township,  county,  city, 
state,  or  nation,  or  of  emergency  undertakings. 

5.  Exchanges   in  business   are   of  two   kinds:    (1) 
transactions — the  exchanges  between  persons,  as  in  buy- 
ing and  selling  or  in  collecting  and  paying  accounts; 
(2)   operations — the  change  in  the  conditions  of  values 
within   a  business;    as,   for   example,   the   manufacture, 
collection  and  distribution  of  ^commodities. 

6.  Entries.     Every  exchange  involves  a  book  entry, 
which  is  a  record  of  the  facts  about  the  exchange  and  an 


INTRODUCTORY  DEFINITIONS    (1-10)  1) 

indication  of  the  component  parts  of  the  business  affected 
by  the  exchange.  The  records  of  the  facts  about  ex- 
changes are  called  the  memoranda;  the  names  of  the 
component  parts  affected  by  the  transactions  are  called 
the  account  titles. 

7.  Books  used  in  bookkeeping  are  of  two  general 
kinds : 

(1).  Journals  are  books  of  original  entry,  in  which 
the  exchanges  of  the  business  are  recorded  consecutively 
as  they  occur.  It  is  presumed  that  all  journal  entries  were 
in  former  times  made  in  one  book  called  the  journal,  al- 
though modern  bookkeeping  assigns  original  entries  to 
various  books,  according  to  the  kind  of  entry.  Among 
them  are  the  journal,  sales  book,  purchase  book,  inven- 
tory book,  and  other  special  books  of  original  entry. 
The  entries  in  all  of  these  are  properly  called  journal 
entries. 

(2).  Ledgers  are  books  of  entries  that  have  been 
transferred  from  the  journals  or  books  of  original  entry, 
according  to  a  scheme  of  classification,  into  separate  ac- 
counts. Ledgers  are  also  divided  into  various  kinds,  de- 
pending upon  the  nature  of  the  accounts  which  they 
contain.  Among  them  are  the  general  ledger,  customers' 
ledger,  accounts  payable  ledger,  and  notes  ledger. 

Note. — The  cash  book  generally  contains  a  consecu- 
tive record  of  transactions  involving  cash  receipts  and 
payments,  while  it  also  contains  the  account  of  cash,  thus 
combining  the  nature  of  journal  and  ledger. 

The  purpose  of  all  special  books  of  original  entry  is 
to  admit  of  consecutive  records  and  partial  account 
classification. 

8.  An  Account  consists  of  a  detailed  summary  of 
all  the   debits   and   credits  pertaining  to   a   given   com- 
ponent part  of  a  business.     The  name  of  that  part  is 
called  the  Title.      The  debits,  regularly  placed  in  a  col- 
umn to  the  left,  show  the  value  which  the  business  or- 
ganization as  a  whole  has  contributed  to  the  named  part. 
The  credits,  regularly  placed  in  a  column  to  the  right. 


10  INTRODUCTORY  DEFINITIONS   (1-10) 

show  the  value  which  the  organization  as  a  whole  has 
received  from  the  named  part. 

The  Balance  is  the  difference  between  the  debit  and 
credit  sums,  or  totals. 

Real  Accounts  are  those  that  represent  cash,  or 
things  of  determined  cash  value  either  owned  or  owing; 
Nominal  Accounts  are  those  that  represent  profits  or 
losses,  resulting  from  business  operations. 

9.  Standard  Account  System.     All  varieties  of  busi- 
ness are  so  similar  in  their  financial  organization  that  one 
uniform  set  of  real  account  titles  may  be  looked  for  in  the 
ledgers  of  all  concerns.     By  this  is  not  meant  that  any 
one  concern  will  have  need  for  all  the  regularly  named 
and  defined  real  accounts,  but  that  so  far  as  its  organiza- 
tion extends,  standard  account  titles  may  be  selected  to 
represent  all  of  its  real  component  parts.     Such  standard 
titles  should  be  selected  because  their  use  will  render 
financial  analysis  much  better  understood  by  all  persons 
interested  than  it  would  be  if  unusual  titles  were  em- 
ployed. 

The  nominal  account  titles,  however,  though  quite 
extensively  standardized,  are  subject  to  great  variation, 
for  they  represent  the  results  of  ever  expanding  human 
operations  and  sometimes  number  as  many  as  several  hun- 
dred in  the  same  concern.  They  are  subject  largely  to 
the  special  needs  of  a  given  business. 

10.  A  Statement  of  a  Business  is  an  exhibit  of  the 
condition  and  progress  of  the  business  as  a  whole. 

There  are  two  phases  of  the  statement  of  a  business : 
(1)  the  Financial  Statement,  which  shows  in  detail  the 
property  and  indebtedness  of  the  business  ,-m<I  Ili«  n 
sultant  net  worth  or  insolvency;  (2)  the  Profit  and  Loss 
Statement,  which  shows  the  causes  and  amounts  of  its 
profits  and  losses  for  a  given  period  of  time,  and  the  re- 
sultant net  profit  or  loss. 

Tin-  financial  statement  is  regularly  taken  from  the 
real  accounts,  and  the  profit  and  loss  statement,  from  the 
nominal  accounts. 


FINANCIAL  STATEMENT  (11-20)— Resources,  Assets      11 

Recapitulation — 1  to  10.  The  main  processes  of 
bookkeeping  are  determined  by  the  principles  of  account- 
ancy, and  consist  of:  (1)  the  making  of  true  original 
entries  in  the  journal  or  in  the  books  taking  the  place  of 
the  journal;  (2)  the  posting  of  the  original  entries  to  the 
ledger,  where  they  appear  classified  in  account  form;  (3) 
the  preparation  of  the  statement  of  a  business  which  ex- 
hibits the  condition  of  its  finances  and  the  results  of  its 
operations,  as  shown  by  the  records,  in  compact  form  for 
examination  and  comparison. 

11.  A  Financial  Statement  of  a  concern  consists  of 

(1)  a  list  of  cash,  claims  collectible,  and  property  owned, 
(called  assets  or  resources),  showing  the  amount  all  told; 

(2)  a  list  of  debts  that  must  be  paid  out  of  the  assets, 
(called  liabilities),  and  their  amount;  (3)  the  difference 
between  the  total  assets  and  liabilities,    (called  the  net 
worth). 

Note. — After  opening  a  business,  if  the  books  are 
properly  kept,  it  should  be  convenient  to  prepare  a  finan- 
cial statement  on  the  last  day  of  any  subsequent  *fiscai 
period,  from  the  results  shown  by  a  group  of  accounts, 
called  real  or  financial.  The  manner  of  keeping  such  ac- 
counts so  as  to  show  the  financial  condition,  is  discussed 
in  the  chapter  following.  (Prin.  21-30). 

12.  Resources  are  the  cash,  claims,  other  property 
and  advantages  that  have  a  value  to  a  given  business. 

Examples. — Moneys,  commodities,  and  *real  prop- 
erty, owned  and  used.  Services,  or  expense  utilities 
bought,  are  resources  during  the  period  of  their  con- 
sumption, and  are  regularly  included  as  such  in  the 
statements  of  banks  and  other  concerns. 

13.  Assets  are  the  cash,  claims  for  cash,  and  other 
property  that  are  of  value  not  only  to  the  concern  owning 
them,  but  that  have  a  value  to  the  purchasing  public. 

13  B.  Eesources  differ  from  assets  in  that  the  word 
resources  implies  that  the  valuation  placed  on  the  prop- 
erty so  considered,  is  the  cash  amount  that  it  would  be 
worth  to  the  going  business,  (i.  e.  the  business  in  opera- 


12  FINANCIAL  STATEMENT  ( 11-20 ) —Liabilities 

tion),  while  the  word  asset  implies  its  value  when  offered 
in  the  general  market  without  the  aid  of  the  business 
organization. 

Example. — A  patent  right  might  be  worth  $10,000  to 
a  going  business  as  a  resource,  while  it  might  not  be 
worth  $1  as  an  asset,  if  offered  for  sale,  or  on  winding  up 
the  business. 

14.  Liabilities  are  the  debts  owed  to  others  that  are 
to  be  paid  from  the  assets  of  the  business. 

14  B.  A  statement  of  "resources  and  liabilities" 
may  or  may  not  be  identical  with  a  statement  of  "assets 
and  liabilities."  If  the  former  statement  should  show 
much  greater  net  worth  than  the  latter,  the  business  is 
to  be  considered  hazardous  to  that  extent.  The  tendency 
of  sound  accountancy  is  to  make  clear  distinctions  be- 
tween resource  and  asset  valuations  and  to  adopt  the 
latter  as  a  basis  for  financial  statements. 

15.  The    Credit    of   a   business,    which    means    the 
amount  of  money  that  can  be  borrowed  for  its  use,  is 
determined  by  bankers  on  the  basis  of  *net  worth  as 
shown  by  a  financial  statement  consisting  of  assets  and 
liabilities.     The    credit   basis   may   be   modified   by   the 
lender's  estimate  of  the  borrower's  business  capacity  and 
honesty. 

16.  The  Assets  of  a  business  may  consists  of  many 
different  things,  each  having  ledger  accounts  to  show  the 
cost  and  value.     The  most  common  assets  are:  cash;  ac- 
counts receivable,  showing  amounts  due  from  others  on 
open  account;  bills  receivable,  the  notes  and  acceptances 
collectible  from  others;  inventory,  showing  the  value  of 
floating  property  and  claims  that  may  be  realized  on; 
ventures,  showing  value  of  moving  property  shipped  out 
but  owned  until  sold;  investments  showing  value  of  in- 
come-earning property  owned;  real  estate,  showing  value 
of  real  property  owned  for  occupancy ;  furniture  and  fix- 
tures, equipment,  live  stock,  machinery,  tools,  etc.,  show- 
ing cost  and  value  under  separate  account  titles. 


FINANCIAL  STATEMENT   ( 11-20 ) —Schedules  13 

17.  The  Liabilities  of  a  business  commonly  consist 
of  accounts  payable,  showing  amounts  owed  to  others  on 
book  account ;  bills  payable,  showing  the  amounts  of  bills 
or  notes  or  other  written  obligations  owed  to  others ;  loans 
payable,  showing  long-time  notes  or  bonds  outstanding 
in  favor  of  others ;  and  capital,  surplus  or  general  reserves 
showing  the  amounts  to  be  finally  withdrawn  from  the 
business  organization  by  the  investors. 

18.  The  Financial  Statement  may  be  explained  by 
separate  lists  or  schedules  of  the  items  making  up  single 
amounts  in  the  statement.     For  example,  Accounts  Re- 
ceivable, given  at  a  certain  amount  in  the  fiinancial  state- 
ment may  be  explained  by  a  separate  list  of  the  persons 
or  firms  that  owe  the  business  on  book  account  and  the 
amounts  they  severally  owe.     Likewise  an  inventory  list 
of  floating  property,  a  list  of  notes  or  bills,  or  articles 
making  up  furniture  and  fixtures,  equipment,  live  stock, 
machinery,  tools,  etc.,  may  often  be  necessary  to  explain 
in  detail  the  articles  making  up  the  given  amounts  in  the 
financial  statement. 

18  B.     If  a  financial  statement  is  made  from  estimate 
or  appraisement  of  property,  where  no  books  have  been 
kept,  or  where  the  books  are  defective  in  this  respect,  all 
items  in  it  should  be  explained  in  the  statement,  or,  if 
there  is  not  enough  room  in  schedules  attached  to  the 
statement.     (See  forms  4F  to  4H). 

When  a  statement  is  made  from  properly  kept  books. 
a  list  of  the  items  of  the  fixed  property,  personal  accounts 
and  bills  may  be  found  in  the  ledger,  while  floating  prop- 
erty and  claims  should  be  found  in  special  inventories. 

19.  Inventory  lists  of  *merchandise  should  show  the 
items  extended  at  cost  price  in  the  first  of  two  columns, 
and  the  estimated  decrease  in  value,  if  any,  in  the  second 
column.      From  the  amounts  of  these  two  columns  the 
asset  value  is  to  be  determined. 

19  B.     Not    infrequently  certain  kinds  of  goods  or 
merchandise  will  increase  in  market  value  while  awaiting 
sale.     Such  increase  should  not  be   added  to  inventory 


14  FINANCIAL  STATEMENT   (11-20)— Model  Forms 

value  for  the  reason  that  the  increase  is  estimated  and  not 
fact,  until  it  realized  by  actual  sale.  The  best  gauge 
of  the  value  of  property  is  the  consideration  actually 
given  in  the  last  bargain  and  sale,  and  not  any  person's 
estimate  of  what  the  property  might  be  sold  for. 

However,  the  sum  set  by  the  purchase  price  must  be 
reduced,  when  the  value  has  evidently  decreased,  because 
safe  business  management  demands  that  any  impairment 
of  the  assets  be  noted. 

20.  Forms  of  financial  statements  are  taken  up  in 
detail  in  this  division,  which  should  be  read  with  the 
forms  referred  to  before  you.  Notice  that  some  of  the 
financial  statements  are  made  from  estimate  or  appraise- 
ment, others  from  the  records  of  a  bookkeeping  system. 
Typical  explanatory  lists  and  schedules  are  also  ex- 
plained. 

20  A.  Form  No.  1.  The  financial  statement  here 
given  shows  the  net  worth  of  the  business  interests  of  a 
certain  person.  If  it  is  not  derived  from  a  set  of  books, 
the  first  item,  1  A,  is  found  by  actual  count  of  the  cash  in 
possession  of  Mr.  Weld.  The  second  item,  1  B,  is  found 
by  an  examination  and  listing  of  the  bonds  which  he 
owned  at  the  time  the  statement  was  made.  The  third 
item,  1  C,  is  taken  from  a  schedule  of  the  furniture  now 
owned.  Since  the  furniture  is  entered  at  cost,  without 
any  mention  of  depreciation,  it  is  assumed  that  the  articles 
have  not  been  in  use  long  enough  to  deteriorate  in  value. 

Since  there  are  no  liabilities,  the  total,  1  D,  exhibits 
the  net  worth,  which  is  always  classed  as  a  liability  of  a 
business  organization  to  the  owner  or  owners. 

Should  the  owner  intend  to  open  a  set  of  books,  this 
statement  would  provide  the  entries  for  four  accounts; 
viz:  Cash;  U.  S.  Bonds;  H.  H.  Furniture;  and  Capital 
account. 

Note. — If  the  proprietor  had  kept  books  prior  to 
nuikin*:  tin-  statement,  the  Hinoiints  iliriv  found  would 
have  been  taken  from  the  accounts  in  his  ledger. 


FINANCIAL  STATEMENT   ( 11-20 ) —Model  Forms  15 

20  B.  Form  No.  2.  This  financial  statement  of  the 
business  interests  of  James  Madison  shows  a  number  of 
assets  and  liabilities.  After  cash,  there  are  entered  three 
account  balances,  2  A,  showing  money  collectible  for  the 
business  organization  from  three  different  persons  who 
owe  Mr.  Madison  on  book  accounts. 

The  item,  2  B,  shows  a  result  of  a  list,  or  inventory, 
of  merchandise  now  in  Mr.  Madison's  possession.  The 
items  making  up  this  total  have  been  computed  at  the 
price  paid  for  them,  and  from  this  total  there  is  de- 
ducted an  amount  equal  to  the  diminishment  in  the  value 
of  any  part  of  the  merchandise,  if  there  were  such  dimin- 
ishment. It  simply  shows  what  the  goods  on  hand  were 
safely  worth  at  the  time  the  statement  was  made. 

The  item,  2  C,  shows  the  cost  of  the  lot  and  building 
occupied  by  the  store.  Unless  there  is  a  recorded  decrease 
in  the  value  of  the  property  since  purchase,  the  cost  is 
considered  the  present  worth  of  the  property. 

The  items,  2  D,  are  balances  payable  by  Mr.  Madison 
to  the  firms  mentioned.  They  are  liabilities,  which  ac- 
counts for  the  amounts  being  carried  to  the  right  hand 
or  liability  column. 

The  total  liabilities  taken  from  the  total  assets,  leave 
a  remainder  of  $6941.41,  which  is  entered  in  red  ink  in 
the  liability  column,  as  the  net  worth,  2  E.  It  shows 
what  would  remain  after  paying  all  debts.  After  enter- 
ing the  net  worth,  the  two  columns  are  proved  by  footing 
them,  and  are  then  ruled. 

20  C.  Form  No.  3.  The  financial  statement  of  the 
business  interests  of  Henry  Morgan  is  evidently  derived 
from  bookkeeping  records. 

The  items,  3  A,  cash  in  hand  and  in  bank  would  to- 
gether appear  as  a  cash  balance  of  $470.10  in  cash  book. 
This  balance  should  be  verified  by  actually  counting  the 
cash  on  hand  and  adding  the  amount  to  the  balance  to 
Mr.  Morgan's  credit  in  the  bank. 

The  item,  3  B,  shows  the  value  of  household  furniture 
by  giving  the  cost  of  the  various  purchases  of  furniture 


16          FINANCIAL  STATEMENT   (11-20)— Model  Forms 

amounting  tq  $1579.40,  as  the  basis.  This  basis  is  modi- 
fied by  a  careful  estimate  that  the  furniture  has,  through 
*depreciation,  lost  25  per  cent  of  its  original  value,  caus- 
ing the  deduction  of  $394.85.  The  remainder,  $1184.55, 
is  the  present  asset  value  of  the  furniture. 

The  items,  3  C,  show  that  two  pieces  of  real  property 
cost  respectively  $3758.40  and  $1600,  which  are  considered 
their  present  worth.  The  items,  3D,  show  that  there  are 
owing  two  amounts  to  be  paid.  These  amounts  owed  are 
secured  by  mortgage  on  the  two  items  in  3  C,  so  that  the 
equity  of  the  owner  in  house  and  lot  is  the  difference  be- 
tween the  worth  of  the  property  and  the  mortgage 
against  it  or  $2158.40.  His  equity  in  the  farm  is  $800. 

The  sum  of  the  assets,  $7013.05,  diminished  by  the 
sum  of  the  liabilities,  $2400,  produces  (3E)  a  net  worth 
of  $4613.05,  placed  in  the  lesser  column  to  show,  by  foot- 
ing, the  excess  of  assets  over  liabilities,  and  in  red  ink,  to 
show  that  the  figures  are  the  result  of  computations 
derived  from  the  previous  parts  of  the  statement. 

20  D.  Form  No.  4.  The  financial  statement  of  the 
Walters  Grocery  Co.,  illustrates  a  number  of  the  items 
explained  by  separate  schedules. 

The  item,  4  A,  comprises  the  total  of  uncollected 
charges  to  the  customers  for  goods  sold.  This  is  ex- 
plained in  detail  by  referring  to  the  list  of  Customers' 
Balances,  4  F,  where  the  persons  and  firms  owing,  and  the 
amounts  owed  are  given  in  detail.  The  total  of  this  list 
verifies  the  amount  entered  in  the  statement.  The  page 
numbers  preceding  the  firm  titles  in  the  schedule  refer  to 
the  ledger  pages  in  which  the  customers'  accounts  are 
kept. 

The  item,  4  B,  comprises  the  total  face  of  notes  owed 
to  the  firm.  This  is  explained  by  the  form,  4  G,  giving  the 
names  of  the  note  payers,  the  date,  the  maturities,  and  the 
amounts,  also  the  numbers  which  were  given  to  the  notes 
wln-ii  they  were  entered  in  a  bills  receivable  book.  The 
figures  before  the  amounts  in  notes  Nos.  9  and  13  show 
that  No.  9  was  originally  for  $82.50,  but  that  $60  had 


FINANCIAL  STATEMENT   (11-20)— Model   Forms  17 

v 

been  endorsed  prior  to  taking  the  list.  No.  13  shows  an 
endorsement  of  $50. 

The  item,  4  C,  in  the  statement  comprises  the  total  in- 
terest earned  or  accrued  on  the  notes  receivable.  This 
is  explained  by  the  column  in  4  G  headed  1 1  interest  ac- 
crued, ' '  where  the  amounts  of  interest  accrued  on  the  sev- 
eral notes  are  given. 

The  item,  4  D,  in  the  statement  shows  the  value  of 
merchandise  on  hand  at  the  time  the  statement  was  taken. 
This  is  explained  by  the  inventory,  4H,  where  all  items 
on  hand  are  listed  at  cost,  showing  a  total  of  $2812.45. 
It  is  found  that  deductions  should  be  made  from  several 
of  the  items  in  stock,  because  of  reduction  in  value  of  the 
goods.  The  proportion  of  the  reduction  is  indicated  by 
fractions  y±,  !/2>  etc.,  placed  after.  The  amounts  deducted 
are  placed  in  the  second  column,  footed,  and  the  total, 
$467.31,  subtracted  from  the  gross  inventory,  leaving  the 
net  inventory,  $2345.14,  which  is  the  amount  carried  to 
the  statemnt. 

The  three  items,  4E,  in  the  statement  comprise  the 
fixed  property  which  should  be  found  entered  in  detail  in 
ledger  accounts,  and  consequently  require  no  explanatory 
schedules.  In  each  case,  however,  there  is  deducted  a  cer- 
tain per  cent  for  depreciation. 

Accounts  payable  is  to  be  explained  by  a  list  of  credi- 
tors'  balances  similar  to  form  4  F,  showing  the  firms  to 
whom  payment  is  to  be  made  and  the  amounts. 

Bills  payable,  consisting  of  only  one  item,  is  explained 
fully  on  the  statement.  If  the  firm  owes  many  notes,  a 
list  similar  to  form  4  G  would  be  made. 

20  E.  Form  5.  The  form  of  a  financial  statement  of 
a  corporation  does  not  differ  from  that  of  a  sole  proprie- 
torship or  partnership.  In  the  form  referred  to,  the  items 
entered  are  so  extensive  and  show  so  many  revisions, 
that  a  better  exhibit  can -be  made  on  an  open  journal 
sheet  with  the  assets  on  the  left  and  liabilities  on  the 
right,  Such  a  form  is  suitable  for  any  extensive  busi- 
ness whether  organized  as  a  corporation  or  not. 


18          FINANCIAL  STATEMENT   (11-20)—  Model  Forms 

Item  5  A.  Referring  to  the  form,  observe  that  the 
total  cash  balance  is  in  three  separate  accounts.  The 
first  three  items  should  agree  with  the  balance  in  the 
cash  book. 

Item  5  B.  After  listing  the  balance  of  accounts 
due  from  customers,  it  is  decided  that  the  total  cannot 
be  collected  but  that  5  per  cent  of  the  total  would  equal 
the  uncollectible  part,  or  eventual  loss.  This  amount  is 
deducted  from  the  face  showing  the  asset  value  'of  ac- 
counts receivable,  as  the  difference,  or  95  per  cent,  of 
the  face  value. 

The  word  reserve,  indicates  that  a  certain  amount 
of  the  profits  is  reserved  or  kept  in  the  business  instead 
of  being  paid  out  as  dividends  to  the  shareholders.  The 
amount  reserved  for  depreciation  plus  the  asset  value 
of  the  accounts  should  together  represent  the  cost  of  the 
accounts;  and  thus  the  net  worth  of  the  business  is  not 
diminished  through  shrinkage  in  collections.  A  reserve 
for  diminishment  or  depreciation  of  any  business  prop- 
erty simply  indicates  that  the  owners  of  the  business 
have  kept  in  the  business  enough  cash,  which  otherwise 
would  have  been  paid  out  in  dividends,  to  ;make  good 
the  diminishment,  or  depreciation  in  the  business  prop- 
erty. Thus  the  reduction  in  value  of  the  property  is 
replaced  by  an  equal  increase  in  the  amount  of  other 
available  assets. 

Item  5  C.  Bills  receivable  also  show  a  shrinkage  in 
value  of  5  per  cent,  which  amount  has  been  reserved 
jiiid  credited  to  a  reserve  account  instead  of  being  paid 
as  dividends. 

Item  5  D.  The  floating  property  of  the  business 
in  three  lots:  (1)  product  or  goods  ready  for  sale  as 
shown  by  inventory  in  schedule  A;  (2)  product  in  pro- 

'•I'  manufacture  which  carries  a  cost  to  date  of  three 
items  taken  from  schedules  B,  ('  and  D;  (these  three 
might  be  combined  in  one  amount  and  entered  as  Un- 
finished Product  it'  desired):  CJ)  raw  or  crude  material 


FINANCIAL  STATEMENT   (11-20)— Model  Forms  19 

ready  for  manufacture  but  not  yet  *routed  as  explained 
in  schedule  E. 

Item  5  E.  The  inventories  of  claims  include  earn- 
ings of  the  business  not  yet  collected,  and  utilities  paid 
for  but  not  yet  realized. 

Item  5F,  5  G,  5  H.  The  three  accounts  of  fixed 
property  each  show  cost  diminished  by  depreciation 
covered  by  reserve  as  in  5  B. 

Item  5 1.  The  four  accounts  here  given  differ  in 
their  significance,  being  both  tangible  and  intangible, 
but  are  alike  in  this  respect  that  depreciation  is  not 
represented  in  a  reserve  account,  but  depreciation  is 
entered  directly  into  the  asset  accounts  so  that  the  led- 
ger balance  represents  the  actual  value. 

Item  5  L.  Among  liabilities  and  liability  inventor- 
ies taken  from  labor  included  in  schedule  C,  but  not  paid 
for,  and  interest  accrued  but  not  paid. 

Item  5  M.  This  is  the  balance  of  the  ledger  account 
of  bills  receivable  which  have  been  discounted  to  other 
parties  who  will  collect  them  in  the  ordinary  course  of 
business.  Until  they  are  collected,  they  remain  a  *con- 
tingent  liability  to  be  accounted  for. 

Item  5  N.  The  total  reserve  credited  on  the  books 
is  $5602.42.  This  reserve  is  divided  into  six  subdivisions. 
The  five  named  on  the  statement  are  to  equalize  the 
various  deductions  made  from  assets  for  diminishment 
in  value.  They  amount,  all  told,  to  $3620.42.  This 
amount  taken  from  the  total  reserve  leaves  $2000,  a 
general  reserve,  which  is  held  in  anticipation  of  business 
reverses.  This  general  reserve  is  an  addition  to  the 
capital,  which  has  been  derived  from  former  profits. 

Item  5  0.  Of  the  capital  stock,  $13000  has  not  been 
issued,  leaving  $62000  on  which  dividends  to  stockholders 
are  to  be  apportioned. 

Item  5  P.  The  total  liabilities  deducted  from  the 
total  assets  leaves  a  remainder  of  $5602.65  to  be  dis- 


20  FINANCIAL  LEDGER   (21-40)— Real  Accounts 

tributed  to  dividends,  reserve,  surplus  or  wherever  de- 
termined by  the  owners. 

Recapitulation  11  to  20.  A  financial  statement  is 
made  to  show  the  net  worth  or  insolvency  of  the  busi- 
ness. It  consists  of  a  listing  of  all  assets  against  all 
liabilities  showing  the  difference,  which  is  net  worth,  if 
assets  exceed  the  liabilities,  or  net  insolvency,  if  the 
liabilities  exceed  the  assets. 

Any  item  of  value  in  a  financial  statement  should  be 
supported  or  explained  by  a  special  list,  or  schedule,  of 
all  the  items  making  up  the  total  amount  of  the  unit,  or 
by  an  itemized  ledger  account. 

It  is  important  that  no  items  of  value  be  entered  in 
a  financial  statement  at  more  than  their  asset  value, 
especialy  when  such  items  are  subject  to  waste,  shrinkage, 
or  depreciation.  As  a  guide  to  a  correct  estimate  of  their 
worth,  fixed  property  should  be  entered  in  the  statement 
so  as  to  show  the  cost.  Appropriate  reductions  are 
made  from  cost  in  order  to  arrive  at  asset  value.  It  is 
the  best  usage  to  reserve  from  profits  a  sufficient  amount 
to  offset  estimated  shrinkage  or  depreciation  and  show 
the  same  in  a  reserve  account  or  several  reserve  ac- 
counts. By  this  means  the  net  worth  of  the  entire  busi- 
ness is  kept  from  falling  below  the  net  worth  at  starting. 

The  difference  between  total  assets  and  total  liabil- 
ities, including  capital  at  begining,  is  the  net  profit  or 
loss  at  the  close  of  the  period  covered  by  the  statement. 

21.  The  Financial  Ledger  contains  11n»  Real  ac- 
counts. These  accounts  show  the  financial  condition, 
that  is,  the  items  making  up  the  capital  of  the  business. 
By  this  is  meant,  (1)  the  cash  account  which,  although 
generally  kept  in  a  different  book,  is  to  be  considered  a 
t>art  of  the  financial  ledger;  (2)  the  accounts  of  all  ot lift- 
assets;  (3)  the  accounts  of  all  liabilities,  including  capi- 
tal stock,  and  all  varieties  of  reserve  accounts. 

When  all  accounts  pertaining  to  the  business  are 
kept  under  one  ledger  cover,  the  financial  ledger  is  that 
division  of  the  whole  ledger  which  contains  the  above 


FINANCIAL  LEDGER   (21-40)— Asset  Accounts  21 

named  accounts,  as  distinguished  from  the  Business 
Ledger,  which  contains  the  nominal  accounts,  or  those 
which  show  the  sources  of  revenue,  income  and  other 
profits,  and  the  expenses  and  other  losses.  (The  chapter, 
"Prin.  72  to  72  S,"  discusses  the  ledger  more  fully.) 
The  financial  ledger  registers  the  activities  of  the  finan- 
cial management,  as  distinguished  from  the  operating 
activities. 

21  B.  The  Financial  Management  of  a  business  con- 
sists in  providing  and  dispensing  free  cash  (called  work- 
ing capital)  to  pay  for  the  needed  utilities  which  must 
be  bought  constantly.  This  working  capital,  or  free 
cash,  is  secured,  first  from  the  investors,  and  afterward 
from  receipts  for  services  performed,  from  sales  of  prop- 
erty, from  the  collection  of  accounts,  notes,  or  other 
claims,  or  from  loans.  Some  of  the  business  property 
may  be  kept  for  sale,  some  for  permanent  use.  Good 
management  requires  that  the  investments  in  fixed  prop- 
erty, or  that  property  which  is  kept  for  permanent  use 
and  which  cannot  be  disposed  of  at  will,  should  not  be 
in  too  large  proportion  to  the  floating,  or  more  easily 
convertible,  property. 

22.  Assets  consist  of  cash  and  of  property  or  claims 
convertible  into  cash.  The  different  kinds  of  assets  are 
divided  into  several  groups  with  reference  to  the  readi- 
ness with  which  they  may  be  turned  into  working  capi- 
tal. They  are  as  follows:  (1)  cash;  (2)  accounts  receiv- 
able, notes  receivable,  bonds  or  other  obligations  of  out 
side  people  to  pay  a  determined  amount  of  cash;  (3) 
floating  property,  including  merchandise,  material  for 
manufacture,  shipping  supplies,  etc.,  not  yet  converted 
into  cash  or  claims;  (4)  fixed  chattel  property,  including 
furniture,  fixtures,  equipment,  machinery,  tools,  etc. ;  (5) 
real  property,  including  ownership  of  lots,  lands  and  build- 
ings; (6)  rights  or  priveleges  guaranteed  by  law,  includ- 
ing franchises,  right  of  way  for  railroads,  patent  and 
copyrights,  good  will,  or  business  advantages  derived 
from  reputation  and  promotion. 


22  FINANCIAL  LEDGER   (21-401— Cash  Account 

23.  Accounts  of  Assets  should  be  kept  in  such  a. 
way  as  to  show:   (1)  the  case  of  cash,  the  receipts,  the 
disbursements,  and  the  amount  on  hand ;  (2)  in  the  case 
of  claims  against  others,  when  and  how  they  are  to  be 
collected;   (3)   in  the  case  of  *fixed  property,  the  cost 
separately    from    depreciation    in    order    to    detenu ii it- 
asset  value;  (4)  whether  all  shrinkages,  waste,  or  depre- 
ciation in  property  have  been  made  good  to  the  business 
in  reserves  in  order  that  the  capital  of  the  business  may 
not  diminish  through  the  diminishment  of  any  part  of 
its  property  values. 

24.  The  Cash  Account  is  the  first  and,  as  a  rule,  the 
account    most   generally   necessary   to    all    business.      It 
ranges  from  the  simple  record  of  receipts  and  disburse- 
ments, unconnected  with  any  other  books  or  accounts, 
to  the   elaborate   special-column  forms  joined  with   the 
ledger  accounts  of  intricate  bookkeeping. 

The  cash  account  should  show  by  its  title  whether 
it  is  a  record  of  current  cash  (that  is,  for  general  expen- 
ditures), or  whether  it  is  a  record  of  cash  set  aside  in  a 
fund  to  be  paid  only  for  some  specific  purpose.  Ordin- 
arily, the  term,  cash  account,  is  understood  to  be  an  ac- 
count of  cash  that  is  to  be  paid,  in  a  general  way,  for 
all  purposes  of  the  business,  while  cash  set  aside  for  a 
specific  kind  of  payments,  is  called  a  fund. 

The  cash  account  should  show,  at  any  time,  (1)  when 
and  from  what  source  cash  has  been  received  into  the 
business;   (2)   when  and  to  what  purpose  cash  was  <lis 
bursed  or  paid  out  of  the  business;  (3)  how  much  cash  is 
remaining. 

The  cash  account  may  be  kept  in  a  ledger  with  other 
accounts,  but  owing  to  the  constant  reference  made  to  it, 
both  in  making  entries  and  in  ascertaining  the  amount 
on  hand,  this  account  is  generally  kept  in  a  separate  book 
ready  for  immediate  entry  or  reference.  The  term,  cash 
book,  means  the  cash  account  kept  by  itself  in  a  separate 
book  of  original  entry.  Study  carefully  the  following 
forms : 


FINANCIAL  LEDGER   (21-40)— Model  Cash  Accounts       23 

24  B.  Form  10  A.  A  simple  cash  account  may  be 
used  without  reference  to  any  other  accounts  or  books. 
In  it  are  recorded  all  receipts  and  payments.  The  re- 
ceipts are  placed  on  the  left,  or  debit  side,  and  the  pay- 
ments on  the  right,  or  credit  side.  On  any  date,  the 
total  credits  may  be  deducted  from  the  total  debits,  to 
show  the  balance  on  hand.  In  the  form  given,  this  ac 
count  was  balanced  on  Saturday  at  the  close  of  Jan.  5, 
and  the  amount  remaining  was  carried  down  for  the  re- 
opening of  Jan.  6,  under  the  double  ruling,  showing  the 
amount  unexpended.  Such  a  cash  book  may  be  balanced 
daily,  weekly,  or  monthly  as  may  be  most  convenient. 

Note. — In  form  10  A,  are  two  columns  headed,  ''led- 
ger account"  and  "postmark,"  which  are  to  be  disre- 
garded if  the  entries  in  the  cash  book  are  not  to  be 
posted  to  the  ledger. 

24  C.  Form  10  B.  This  is  the  same  cash  book  as 
10  A,  with  the  addition  of  the  entries  of  the  ledger  ac- 
count titles  and  the  pages  of  the  ledger  where  they  are 
found.  These  page  numbers  are  to  be  entered  prior  to 
posting,  and  serve  as  guides  to  the  pages  in  the  ledger. 
When  the  posting  is  done,  a  check  mark  is  placed  after 
the  page  number.  In  the  form,  the  entries  from  Jan.  1 
to  Jan.  5  are  shown  to  have  been  posted;  the  entries 
from  Jan.  6  to  Jan.  12  are  shown  ready  to  be  posted. 
Thus,  the  first  entry  on  Jan.  1  may  be  found  posted  to 
the  credit  of  the  Capital  account  on  page  3.  (See  form 
10  E.)  The  last  entry  on  Jan.  5  may  be  found  posted 
to  the  debit  of  the  Savings  Fund  account  on  page  1.  (See 
form  IOC.) 

24  D.  When  the  payments  and  receipts  of  cash  are 
entered,  with  other  transactions,  in  a  complete  journal, 
the  cash  debits  and  credits  are  posted  to  a  Cash  account 
kept  in  the  ledger.  This  account  is  illustrated  in  form 
12  C.  This  form  may  be  used  where  the  payments  are  all 
made  by  check  in  a  small  business.  In  that  case  the  check 
stubs  must  be  looked  to  for  a  full  record. 


24  FINANCIAL  LEDGER   (21-40)— Funds 

24  E.  Form  10  C.  Certain  amounts  of  cash  may  be 
separated  from  the  general  cash,  and  held  apart  for  some 
particular  class  of  expenditures,  or  for  some  special  pur- 
pose. Cash  thus  set  aside  is  called  a  fund. 

One  may  set  aside  cash  in  a  bank  savings  account 
with  a  view  to  the  accumulation  of  the  amounts  saved, 
and  their  accretions,  for  future  needs,  in  a  Savings  Fund. 
One  may  set  aside  an  amount  of  cash  each  year,  and  in- 
vest it  in  interest  bearing  securities,  with  a  view  to  the 
final  accumulation  of  enough  cash  to  meet  a  future 
maturing  debt.  This  would  be  called  a  Sinking  Fund. 
Cash  may  be  set  aside  in  a  Building  Fund,  with  a  view  to 
constructing  a  building  when  sufficient  savings  are 
accumulated. 

Funds  are  set  up  for  temporary  purposes:  thus,  a 
Contingent  Fund  consists  of  amounts  set  aside  to  pay  ob- 
ligations likely  to  arise,  but  not  yet  fully  determined;  a 
Cashier's  Fund,  or  Imprest  Fund,  consists  of  amounts  en- 
trusted to  the  cashier,  out  of  which  he  makes  payments 
as  occasions  arise,  and  reports  the  payments,  later,  for 
entry. 

The  account  of  a  fund  is  charged  for  the  money 
transferred  to  it,  or  accruing  to  it;  and  is  credited  for  any 
money  withdrawn  from  it. 

24  F.  Cash  accounts  are  kept  in  cash  books  of  var- 
ious forms  adapted  to  various  business  requirements. 
(See  Prin.  74  to  74 H.)  These  cash  books  may  have  many 
columns  on  both  the  debit  and  credit  sides.  (1nluimm :• 
cash  books,  if  arranged  to  accord  with  correct  accounting 
principles,  must  contain  one  certain  debit  column  which 
includes  all  cash  receipts,  and  one  certain  credit  column 
which  includes  all  cash  payments.  These  two  columns 
an-  to  be  regarded,  respectively,  as  the  debit  and  the 
credit  sides  of  the  account.  Any  extra  columns 
found  in  a  cash  book  are  used  for  purposes  of  classifi- 
cation, and  are  to  be  distinguished  from  cash  account. 

25.  Claims  against  others.  After  accounts  of  cash, 
there  follow  a  number  of  accounts  that  represent  a  *con- 


FINANCIAL  LEDGER   (21-40)— Accounts  Receivable        25 

tracted  amount  of  cash  collectible  on  demand  or  at  some 
future  time.  These  are  divided  into,  (1)  Accounts  Re- 
ceivable,  or  the  current  charges  against  persons  and 
firms;  (2)  accounts  of  Bills  Receivable,  or  notes  and  ac- 
ceptances, evidenced  by  paper  signed  by  payers  and  held 
in  the  business;  (3)  accounts  of  Bonds  and  Mortgages  and 
other  long-time  interest-bearing  obligations,  issued  by 
municipal  authority,  by  corporations,  or  by  individuals; 
(4)  accounts  of  Stocks,  which  represent  a  part  interest  in 
the  capital  of  other  business  concerns.  These  accounts 
all  represent  appropriations  of  the  capital  of  the  busi- 
ness, and  are  the  result  of  the  loan  of  money  or  of  sales 
to  others  on  credit.  They  are  called  quick  assets,  be- 
cause they  may  be  either  collected  in  a  short  time,  or,  in 
the  case  of  notes  or  securities,  they  may  be  disposed  to 
investors  for  ready  cash. 

25  B.  Accounts  Receivable  are  the  ledger  records 
of  the  amounts  owed  to  the  business  by  persons  and 
firms  that  have  received  value  on  book  account.  The 
terms  "customers'  accounts"  or  "trade  debtors"  are 
often  used  in  the  same  sense.  The  arrangement  of  ac- 
counts receivable  differs  in  the  several  ways  mentioned 
in  the  following  paragraphs. 

25  C.  Where  the  accounts  consist  of  only  one  item 
to  be  collected  from  the  person  or  firm  named,  they  may 
be  entered  under  the  general  heading,  ' '  Sundry  Accounts 
Receivable."  Each  person's  debit  occupies  one  line, 
showing  the  date,  payer,  and  amount.  When  payment 
is  made,  the  credit  should  be  posted  to  the  line  opposite 
the  charge.  (See  Form  11  B.)  Where  a  number  of  per- 
sons are  assessed  or  subscribe  certain  amounts  to  be  paid 
later,  a  similar  account  headed  "Subscription"  or  "As- 
sessments" is  used. 

The  C.  0.  D.  (Collect  on  Delivery)  account  contains 
the  charges  to  sundry  customers  for  goods  to  be  de- 
livered and  paid  for  when  delivery  is  made.  In  this 
account,  a  line  is  reserved  for  each  sale,  in  which  is 
posted  the  date,  name  of  buyer,  and  amount  on  the  debit 


26        FINANCIAL  LEDGER   (21-40)— Accounts  Receivable 

side.  Sometimes  the  sale-number  or  the  name  of  the  col- 
lector is  entered  instead  of  the  buye'r's  name.  At  any 
rate,  the  explanation  should  be  such  as  readily  to  refer 
to  the  item.  When  the  sale  is  delivered  and  the  cash  is 
returned,  a  credit  is  entered  on  the  same  line  as  the  cor- 
responding charge.  The  C.  0.  D.  account  is  kept  among 
the  other  customers'  accounts.  (See  Form  14  M.) 

25  D.  Where  the  accounts  receivable  consist  of  ac- 
counts on  each  of  which  there  are  a  number  of  charges 
or  of  credits,  or  both  charges  and  credits,  each  account 
should  have,  as  its  title,  the  name  of  the  person  or  firm 
to  which  the  charges  or  credits  relate  (See  Form  12  H). 
The  dates  and  amounts  of  the  several  charges  are  entered 
on  the  debit  side,  and  the  dates  and  amounts  of  the  pay- 
ments are  entered  on  the  credit  side. 

Customers'  accounts  should  be  kept  with  the  utmost 
care,  because  they  represent  a  certain  portion  of  th«- 
capital  of  the  business  intrusted  to  outside  persons,  which 
capital  will  be  lost  if  collection  cannot  be  made.  In  ad- 
dition to  the  customer's  name  as  title  at  the  top  of  tin1 
account,  and  the  dates  and  amounts  of  charges  on  the 
debit  side,  with  the  dates  and  amounts  of  credits  on  the 
credit  side,  other  needed  memoranda  may  appear  in  the 
account,  as  follows: 

(1)  The  address  of  the  customer,  which  should  fol- 
low the  title. 

(2)  The  credit  limit  or  the  largest  amount  which 
he  is  allowed  to  buy  on  account.     If  a  person  other  than 
the  buyer  is  responsible  for  payment,  the  fact  should  be 
noted  in  the  explanatory  space  for  debits. 

(3)  The   terms   of  the   sale,   if  special   terms   are 
granted,  should  also  be  entered. 

(4)  The  credit  side  may  specify  wln-tln-r  credits  are 
in  cash  or  in  part  cash,  and  part  discount,  or  notes,  or  al- 
lowances; also  if  sight  drafts  are  drawn,  this  should  be 
si i own  in  pencil  opposite  the  charge  drawn  against. 

(5)  Any  memoranda  that  will  aid  in  keeping  tho 


FINANCIAL  LEDGER   (21-40)— Bills  Receivable  27 

account  from  becoming  too  large,  or  in  collecting  it 
promptly. 

25  E.  When  the  number  of  current  accounts  re- 
ceivable increase  so  as  to  fill  up  the  assigned  division  of 
the  complete  ledger  (Prin.  72  B)  too  rapidly,  they  should 
be  taken  from  the  complete  ledger  and  kept  in  a  sub- 
sidiary ledger  (Prin.  72  C)  called  the  Accounts  Receiv- 
able, Customers',  Trade  Debtors',  or  Individual  ledger. 
When  so  kept,  the  aggregate  amounts  of  debits  and 
credits  in  the  subsidiary  ledger  are  posted  to  a  control- 
ling account  in  the  general  ledger.  (Prin.  72  D). 

25  F.  Bills  Receivable  or  Notes  Receivable  is  the 
title  charged  for  the  notes  or  acceptances  received  into 
the  firm  from  others.  Such  notes  are  ordinarily  received 
from  sale  of  goods,  in  settlement  of  book  accounts,  or 
for  money  loaned,  and,  as  a  rule,  do  not  extend  over  one 
year  in  time,  usually  but  a  few  months. 

They  may  be  recorded  in  two  general  ways: 

25  G.  Where  few  notes  or  acceptances  are  received, 
the  record  of  each  note  may  be  made  in  a  separate  line 
under  the  ledger  title,  Bills  Receivable,  among  the  asset 
accounts.  This  line  can  show  on  the  debit  side  the  date 
received,  payer,  when  due,  and  amount.  When  the  note 
is  paid,  the  credit  should  be  entered  in  the  credit  side 
on  the  same  line,  opposite  the  charge  for  the  note  that 
the  credit  is  payment  for.  Use  x  mark  (See  Form  11  C) 
to  indicate  settlement  so  that  in  'making,  any  list  of 
notes,  those  without  x  mark  only  will  be  included. 

Remark. — Business  men  frequently  discount  bills  re- 
ceivable, in  order  to  secure  ready  cash,  instead  of  holding 
the  notes  until  maturity.  Although  a  discounted  note  is 
supposed  to  be  settled,  so  far  as  the  payee  is  concerned, 
when  he  indorses  it  to  another,  yet,  on  failure  of  the 
maker  to  take  it  up  at  maturity,  the  endorser  is  ordi- 
nariy  liable  for  its  payment.  The  note  is  not  to  be  cred- 
ited off  the  Bills  Receivable  account  until  this  obligation 
of  the  payee  ceases.  Its  collection  is  a  matter  of  concern 
to  the  payee  as  well  as  to  the  holder.  Bills  Receivable 


28  FINANCIAL  LEDGER   (21-40)— Loans 

Discounted  should  be  credited  with  the  face  of  the  notes 
thus  transferred.  The  account  of  Bills  Receivable  Dis- 
counted represents  a  contingent  liability,  and  is  placed 
in  the  liability  division  of  the  financial  ledger  (See  Prin. 
35  B). 

Remark. — Notes  usually  draw  interest  .  The  collec- 
tions of  interest  have  no  effect  on  the  Bills  Receivable 
account,  but  are  credited  to  the  Interest  Account  in  the 
business  ledger,  payments  to  apply  on  principal  only 
are  credited  to  Bills  Receivable  account. 

25  H.  When  bills  receivable  are  sufficiently  numer- 
ous, they  are  recorded  in  a  bills  receivable  book  or  a 
note  ledger  which  has  columns  for  a  complete  description 
of  each  note.  Each  line  of  the  bills  receivable  book  is 
numbered  and  the  number  written  on  the  note  described 
in  the  given  line,  so  that  the  notes  are  known  by  num- 
ber, and  the  number  of  any  note  refers  to  its  description 
in  the  note  ledger. 

When  so  entered,  the  title,  Bills  Receivable,  among 
the  assets  in  the  financial  ledger  is  debited  or  credited 
for  the  aggregate  of  all  notes  entered  as  received  or 
paid,  in  the  note  ledger,  or  bills  receivable  book.  Bills 
Receivable  is  the  controlling  account  for  the  separate 
bill  record. 

25  I.  Mortgage  Loans  are  long-time  (from  one  year 
to  ten  or  more  years)  obligations,  and  draw  a  stated  rate 
of  interest  payable  annually,  semi-annually  (every  six 
months)  or  quarterly  (every  three  months). 

They  are  usually  received  directly  from  the  borrower 
or  are  bought  as  an  investment  by  those  who  wish  to 
place  their  money  on  a  safe  income-earning  basis  and 
who  are  satisfied  with  the  profit  derived  from  interest. 

A  ledger  asset  account  under  the  title,  Mortgage 
Loans  Receivable  may  be  kept.  This  is  in  the  same  form 
as  the  account  of  Bills  Receivable  (see  Form  11  C).  Tin- 
account  is  charged  for  the  face  of  the  Loans  and  credited 
for  the  payment  of  principal.  The  interest  receipts  col- 
lected from  them  are  credited  to  interest  account  which 


FINANCIAL  LEDGER    (21-40)  — I'.omls.    Inventory  29 

is  kept  in  the  part  of  the  ledger  reserved  for  nominal 
accounts. 

Loan  papers  are  often  purchased  for  an  amount 
equal  to  both  principal  and  accrued  interest  In  that  case 
the  interest  accrued  should  be  charged  to  Interest  ac- 
count (not  to  Mortgage  Loans)  so  that  the  charge  will 
be  the  face  of  the  paper.  When  paid  a  credit  is  made 
opposite  to  the  charge  for  the  given  payment. 

Loan  records  may  be  kept  in  a  separate  subsidiary 
ledger  or  record,  of  which  a  controlling  account  in  the 
general  ledger  will  give  the  aggregates,  or  they  may  be 
recorded  in  an  ^auxiliary  book.  This  subsidiary  book 
contains  ruled  columns  for  description  of  each  item  like 
the  bills  receivable  book. 

25  J.  Debenture  Bonds  or  single  Bonds  are  issued 
by  the  nation,  state,  city,  county,  township,  school  dis- 
trict or  other  public  corporations;  by  transportation, 
trading,  manufacturing,  or  service  corporations,  by  firms 
and  by  private  persons,  as  evidence  of  their  promise  to 
pay  at  a  future  time  a  sum  of  money  with  annual,  semi- 
annual or  quarterly  payments  of  interest  thereon.  Bonds 
are  frequently  secured  by  mortgage  on  property.  Bonds 
are  bought  by  the  investor  at  par,  at  a  premium  or  at  a 
discount.  When  bought,  an  account  describing  the  kind 
of  bonds  is  charged  for  their  face,  when  sold,  the  account 
is  credited  at  face  and  the  difference  to  the  Profit  and 
Loss  account. 

When  a  premium  is  paid  at  purchase,  the  amount  of 
the  premium  is  to  be  charged  to  an  account  of  Premium 
on  Bonds.  This  premium  account  is  an  asset  to  be 
*  amortized  by  annual  proportionate  amounts  carried  to 
Profit  and  Loss. 

When  bonds  are  bought  at  a  discount,  the  amount 
of  the  discount  should  be  credited  to  Discount  on  Bonds 
account,  a  resreve  liability,  such  discount  to  be  extin- 
guished by  annual  charges  as  in  the  case  of  premium. 

26.  The  Inventory  Account  is  charged  at  the  close 
of  the  fiscal  period  for  the  value  of  all  floating  property 


30         FINANCIAL  LEDGER    (21-40)—  Inventory  of  M«lst>. 

on  hand  and  for  unrecorded  collectible  claims  and  con- 
vertible values  that  have  accrued  during  the  fiscal  period. 
These  debits  remain  in  the  account  as  nominal  assets  dur- 
ing the  following  fiscal  period  and  at  the  close  are 
credited  out  of  the  inventory  account  and  charged  into 
the  business  accounts  into  which  they  are  regularly  ab- 
sorbed. 

At  the  time  the  old  inventories  (those  carried  from 
the  begining  of  a  fiscal  period)  are  closed  out  of  Inven- 
tory account  into  the  business  accounts,  the  new  in- 
ventories (those  made  at  the  close  of  the  fiscal  period) 
are  charged  into  the  Inventory  account  where  the  latter 
remain  to  the  close  of  the  next  following  fiscal  period 
and  are  in  turn  closed  out  as  before.  Thus  reference  to 
the  Inventory  account  in  the  financial  ledger  at  any  time 
will  exhibit  the  value  of  the  otherwise  unrecorded  assets 
of  the  business  at  the  begining  of  the  given  fiscal  period. 
This  amount  may  not  be  the  real  value  of  an  inventory 
taken  subsequent  to  the  entry,  but  it  is  the  nearest  esti- 
mate that  is  suitable  for  record,  and  owing  to  its  gen- 
erally being  taken  when  stock  of  merchandise  is  low,  is 
considered  safe. 

(For  taking  inventory  see  Prin.  77;  for  charge  and 
credit  see  Prin.  72  P;  for  liability  inventory  see  Prin.  34.) 

26  B.  .  Merchandise,  or  stock  of  goods  for  sale,  gen- 
erally comprises  the  most  important  inventory  and  fre- 
quently the  only  one  considered.  The  inventory  v;i hit- 
should  be  based  on  cost,  not  estimate. 

The  Cost  of  Merchandise  is  the  purchase  price  and 
all  the  expenses  necessary  to  lay  the  same  down  in  the 
sales  room.  These  expenses  consist  of  freight  and  tnms 
fer  charges  necessary  to  place  same  in  the  store.  11  is 
customary  for  large  stores  to  purchase  goods  long  before 
they  are  to  be  placed  in  the  sales  room.  Such  goods 
are  left  in  warehouses  for  storage  until  the  sales 
season  arrives.  The  warehouse  expenses  with  the  freight 
mid  inmstir  expenses,  are  included  as  part  of  the  cost 
of  tin-  inci-cliniidisc. 


FINANCIAL  LEDGER   (21-40)— Other  Invoiitorirs  31 

When  the  same  articles  have  been  bought  at  differ- 
ent times  for  different  prices,  the  last  price  paid  is  to 
be  used.  After  the  cost  of  merchandise  is  found,  de- 
preciation in  value  of  any  of  the  articles  should  be 
taken  into  account  before  the  real  value  can  be  de- 
termined. ( See  Form  4  H.) 

Remark. — The  inventory  principles  of  determining 
the  asset  value  of  floating  property  is  often  applied  to 
fixed  properties  such  as  furniture  and  fixtures,  real 
estate  and  even  notes  and  accounts.  This  should  be 
discouraged  because  all  such  items  remain  in  the  busi- 
ness as  charged  and  their  value  is  more  safely  determined 
by  estimating  depreciation  as  a  deduction  from  the  cost 
already  recorded  in  the  ledger. 

Remark. — When  the  Inventory  of  floating  property 
is  charged  for  material,  or  expense  items,  the  correspond- 
ing credit  is  to  the  materials  or  expense  account  affected, 
and  is  continued  into  the  next  period  precisely  as  in  the 
case  of  merchandise. 

26  C.     Inventories   of   Claims   Receivable.     At    the 

close  of  a  fiscal  period,  certain  assets  that  have  not  been 
previously  recorded  should  be  included.  Among  these 
are  interest  accrued  on  bills  or  accounts  receivable  and 
any  other  items  chargeable  and  earned  but  not  entered. 
Such  items  should  be  entered  in  the  inventory  book,  and 
charged  to  Inventory  account  or  the  above  title  if  a 
separate  inventory  account  is  desired,  through  the  jour- 
nal or  from  inventory  book,  and  the  account  to  which 
they  pertain,  credited.  At  the  close  of  the  following 
fiscal  period,  the  nominal  account  to  which  they  pertain 
is  charged  for  the  amount  of  the  inventory  and  the 
Inventory  account  is  credited  to  balance.  The  latter  ac- 
count is  then  charged  for  the  new  inventory  as  before. 

27.  Permanent  property  may  be  owned  either  for 
use  or  for  sale.  Furniture  and  fixtures,  machinery,  and 
other  equipment  are  purchased  for  use.  Chattels  may 
be  taken  in  payment  of  debt  or  purchased  by  way  of  in- 
vestment or  for  speculation.  There  is  a  distinction  be- 


32      FINANCIAL  LEDGER  (21-40)— Equip' t— Depreciation 

tween  the  accounts  of  property  for  use  and  for  specula- 
tion. The  forms  explained  under  this  article  (27)  refer 
to  chattel  property  purchased  to  be  retained  for  the  use 
of  the  business.  Such  properties  are  called  Fixed  Assets 
because  they  occupy  a  fixed  place  in  the  business  organi- 
zation. 

27  B.  Equipment  is  a  title  referring  in  a  collective 
way  to  the  articles  or  property  making  up  a  special 
outfit  for  a  given  business  use  (see  Form  10  D).  Differ- 
ent business  organizations  may  require  delivery  equip- 
ment, building  equipment,  heating  equipment,  threshing 
equipment,  or  other  equipment.  Certain  universally 
used  kinds  of  equipment  are  given  special  titles,  like 
"Furinture  and  Fixtures,"  "Rolling  Stock,"  "Machin- 
ery and  Tools,"  etc. 

The  account  is  charged  for  the  cost  of  the  articles 
comprising  the  outfit.  These  charges  should  appear  in 
the  ledger  account  in  detail,  that  is,  the  name  and  price 
of  every  article  should  be  given  a  line. 

If  any  of  the  articles  of  the  equipment  are  sold,  the 
account  should  be  credited  for  the  cost  price  of  the  item 
sold,  the  credit  appearing  on  the  same  line  of  the  ledger 
account  with  the  charge,  and  the  difference  between  the 
cost  and  selling  price  entered  to  Profit  and  Loss  account, 
or  to  Reserve  for  Depreciation,  if  such  an  account  is 
carried.  By  crediting  sales  from  any  property  account 
at  cost,  the  ledger  account  will  show  the  balance  of  the 
account  (or  difference  between  the  debit  and  credit  foot- 
ings) to  be  the  exact  amount  invested  in 'the  remaining 
portion. 

27  C.  In  view  of  the  wear  and  tear  incident  to  all 
buildings  and  equipment,  the  value  of  such  property  is 
constantly  undergoing  depreciation,  that  is,  ordinary  re- 
duction in  value  .by  use.  This  depreciation  is  easily  com- 
puted from  a  knowledge  of  the  ordinary  term  of  use- 
fulness of  the  kind  of  equipment  considered.  In  order 
that  this  depreciation  may  not  impair  the  capital  of  the 
business,  the  correct  practice  is  to  charge  as  an  expense, 


FINANCIAL  LEDGER   (21-40)—  Furn.  &  Fix.— R.  Est.      33 

at  the  close  of  each  fiscal  period,  an  amount  equal  to 
the  loss  through  depreciatoin ;  that  is,  to  enter  deprecia- 
tion as  an  expense  belonging  in  the  fiscal  period,  in  which 
the  depreciation  occurs.  The  account  credited  in  the 
financial  ledger  for  the  amount  thus  charged  is  entitled 
Reserve  for  Depreciation  (Sundry)  if  one  reserve  is  kept 
for  depreciation  on  all  accounts.  It  is  frequently  ad- 
visable to  open  a  separate  reserve  account  for  each  fixed 
asset  account,  thus,  Reserve  for  Depreciation  (Office  Fur- 
niture), Reserve  for  Depreciation  (Delivery  equipment), 
etc. 

When  so  treated,  the  accounts  of  fixed  assets  show 
the  first  cost,  which  should  equal  the  present  value  plus 
amount  credited  in  Reserve  for  Depreciation  accounts. 

When  fixed  business  property  is  sold,  the  difference 
between  cost  and  selling  price  is  a  charge  to  the  Reserve 
for  Depreciation  account. 

27  D.  Furniture  and  Fixtures  is  the  title  of  the  ac- 
count of  the  business  equipment  consisting  of  such  items 
as  desks,  chairs,  counters,  shelving,  showcases,  the  office 
and  store  appliances  generally.  Charge  the  account  at 
cost  for  items  bought;  credit  at  cost  any  sales;  apportion 
a  reserve  out  of  profits  for  depreciation  as  in  special 
equipment  accounts  above. 

28.  Any  real  estate  held  for  the  use  of  the  business 
should  have  a  separate  ledger  title  for  each  piece,  thus. 
"Building  &  Lot  No.  58-60  Market  St.,  "Lot  7,  Blk.  2, 
McGrews  1st  addition  to  Chicago,"  "Farm  Property  S. 
E.  %,  N.  W.  %,  S.  5,  Twp.  27,  R.  5  W.,  6  P.  M.,"  etc. 

These  titles  are  long  and  cumbersome  for  ordinary 
posting  entry,  although  useful  in  the  ledger.  They  can 
easily  be  abbreviated  in  the  books  of  original  entry. 

Real  Estate  accounts  should  be  charged  for  the  dbst 
of  the  property,  including  expenses  of  securing  title  and 
preparing  for  occupancy,  for  the  cost  of  any  additions 
to  buildings  or  permanent  improvements,  (but  not  for 
expenses  in  repairing  or  replacing  damages).  They 
should  be  credited  at  cost  for  sale  of  property  or  any 


34  FINANCIAL  LEDGER  (21-40)— Intangible  Assets 

part  of  it,  and  the  difference  between  cost  and  selling 
price  credited  or  charged  as  the  case  may  be  to  Profit  & 
Loss  account,  or  if  Profit  &  Loss  account  is  reserved  for 
the  operating  profits  only,  to  Surplus  account. 

Remark. — The  ordinary  expenses  of  keeping  the 
property  up  to  the  condition  at  starting  and  the  income 
derived  from  the  rent  of  the  property  are  entered  to  an 
Income  and  Expense  account,  of  the  given  property  (See 
Prin.  59.) 

28  B.  The  general  tendency  of  land  is  to  increase 
the  value,  of  buildings  to  depreciate.  Depreciation 
should  be  equalized  by  an  appropriate  reserve  from 
profits,  in  order  that  capital  may  not  be  impaired. 

Increase  or  appreciation  in  the  value  of  the  ground 
is  not  properly  represented  by  an  account  of  ll  Appre- 
ciation" for  the  reason  that  such  increase  in  value  con- 
tributes nothing  to  the  available  capital  of  a  business 
before  the  property  is  sold.  If  a  person  were  to  enter 
appreciation  in  land  value  as  a  part  of  the  business  assets, 
a  fortunate  rise  in  a  piece  of  property  might  cause 
that  property  to  equal  in  value  the  entire  original  in- 
vestment, causing  all  other  property  to  appear  as  profits 
subject  to  conversion  and  withdrawal.  Such  action 
would  result  in  there  remaining  no  business  organization. 

Remark. — Where  greater  exactness  is  desirable,  the 
general  account  of  buildings  and  grounds  should  be 
divided  into  two  accounts — one  for  buildings,  or  for  each 
building,  the  other  for  grounds. 

29.  A  number  of  intangible  assets  may,  under  cer- 
tain circumstances,  appear  in  the  ledger;  among  them, 
Goodwill  (Prin.  29  B),  which  account  is  charged  for 
the  amount  paid  by  a  succeeding  owner  to  the  former 
owner  for  the  various  trade  advantages  accruing  to  the 
business  from  the  advertising,  promotion  or  location  de- 
veloped by  the  seller  of  the  business  who,  through  the 
sale,  relinquishes  his  right  to  compete;  Franchise  (Prin. 
29  C),  or  the  special  business  rights  conferred  on  a  public 
service  company;  Insurance  (Prin.  29  D),  and  Taxes, 


FINANCIAL  LEDGER  (21-40)— Good  Will,  Franchise        35 

when  covering  a  period  exceeding  the  fiscal  period  and 
to  be  absorbed  in  the  course  of  time;  Copyrights  (Prin. 
29  E),  or  Patent  Rights  (Prin.  29  F),  etc. 

Such  accounts  should  be  charged  for  the  actual  cost 
(not  an  estimated  value)  and  ordinarily  should  be  re- 
duced by  credit  at  the  close  of  succeeding  fiscal  periods 
for  an  estimated  reduction  of  the  portion  actually  con- 
sumed, if  such  is  plainly  apparent,  or  arbitrarily  reduced 
with  a  view  to  final  extinguishment. 

It  is  not  advisable  to  credit  a  reserve  account  for  the 
diminishing  value  of  such  assets  (as  is  the  better  way  to 
account  for  depreciation  in  fixed  property),  but  instead, 
to  credit  the  amount  written  off  directly  to  the  account 
with  a  corresponding  charge  to  Profit  and  Loss. 

29  B.  Good  Will  account  should  be  charged  for  cost 
at  the  time  of  purchase.  Additional  charges  should  not 
subsequently  be  made,  even  though  it  is  apparent  that 
the  good  will,  if  the  business  were  sold,  would  bring  a 
much  higher  figure  than  appears  on  the  ledger.  On  the 
contrary,  it  should  be  reduced  by  credits  out  of  the 
profits  at  as  early  a  date  as  possible  with  a  view  to  its 
final  extinguishment. 

29  C.  Franchise  account  is  similarly  charged  for  the 
cost  of  a  franchise  conveyed  to  the  business.  It  is  ordi- 
narily extinguished  by  limitation  of  the  period  during 
which  it  is  enjoyed,  and  hence,  represents  a  diminishing 
asset  that  should  be  equalized  by  charging  Profit  and 
Loss  and  crediting  the  franchise  each  year  with  the 
amount  of  the  expired  portion. 

29  D.  Insurance  account  is  charged  for  the  cost  of 
premium  on  insurance  policies.  At  the  close  of  regular 
periods,  sometimes  monthly,  sometimes  annually,  the 
account  should  be  credited  for  the  consumed  portion 
and  the  expense  account  of  the  business,  or  of  the  de- 
partment to  which  it  belongs,  charged. 

29  E.  Patent  Rights  account  should  be  charged  for 
the  price  paid  to  a  patentee  of  a  right  to  manufacture 
and  sell  a  patented  article.  Such  patents  expire  by  time 


36          FINANCIAL  LEDGER   (21-40)— Speculative  Acc'ts 

limitation.  The  account  should  be  credited  from  time  to 
time  for  an  amount  sufficient  to  equalize  the  diminishing 
value  of  the  patent.  The  account-title  should  describe 
the  particular  patent. 

29  F.  Copyrights  account  covers  the  right  to  print 
and  sell  books,  pictures  or  other  copyrighted  matter. 
This  account  is  treated  in  the  same  way  as  patent 
rights. 

30.  Speculative  Accounts.  Speculation  is  busi- 
ness venture  that  involves  unusual  risk  for  the  purpose 
of  realizing  unusual  gain.  Thus,  a  piece  of  land  may 
be  bought  for  a  certain  sum  in  the  hope  that  a  customer 
will  be  found  who  will  buy  it  for  a  greater  sum  than 
that  paid  for  it.  Such  speculation  differs  from  business 
investment.  In  the  latter,  property  is  bought  for  use  or 
for  trading,  that  is,  distributing  goods  to  consumers  by 
purchase  and  sale  primarily  without  reference  to  market 
*fluctuations.  Speculation  may  consist  in  buying  com- 
modities for  shipment  and  sale  in  a  distant  market; 
development  of  patents  or  copyrights,  or  securing  prop- 
erty or  claims  of  any  kind  with  a  view  to  realizing  more 
than  their  present  current  value.  It  may  also  consist 
in  buying  the  obligation  of  another  to  deliver  a  commod- 
ity at  a  future  date  as  is  frequent  in  board  of  trade 
transactions. 

Similarly  treated,  is  property  taken  for  debt,  as 
when  a  bank  or  lender  takes  over  property  given  for 
security.  Likewise,  when  an  educational  or  eleemosynary 
institution  receives  property  as  a  gift  to  be  disposed  of 
for  its  benefit,  the  account  of  the  property  so  treated 
would  be  that  of  a  speculative  account. 

An  account  of  the  speculation  is  headed  with  a  de- 
scriptive title,  as:  Shipment  to  Central  Commission  Co., 
Speculation  in  Oregon  Timber,  Publication  of  Base  Ball 
Score  Cards,  Futures  in  May  Wheat,  Salvage  of  Jackson 
Elevator,  "Maywood  Addition." 

Speculative  accounts  are  charged  for  the  cost  of  the 
property  bought  (or  the  appraised  value  of  gifts),  also, 


FINANCIAL  LEDGER   (21-40)— Stocks  37 

for  expenses  attached  to  the  speculation,  and  are  cred- 
ited for  incidental  incomes  derived  therefrom.  When 
the  speculation  is  closed  out  by  sale,  the  account  is  cred- 
ited for  an  amount  equal  to  the  debit  balance,  and  the 
difference  between  the  debit  balance  of  the  account,  and 
the  amount  realized  from  the  sale  is  posted  to  Profit  & 
Loss,  from  the  original  entry. 

30  B.  Shares  of  stock  are  the  divisions  of  owner- 
ship in  the  capital  of  the  companies  issuing  the  shares. 
The  stocks  considered  here  are  those  issued  by  outside 
companies  and  purchased  and  held  in  the  way  of  specula- 
tive investments  The  ordinary  share  of  stock  represents 
a  par  value  of  $100,  that  is,  a  part  ownership  amounting 
to  $100  in  the  capital  and  a  proportionate  share  of  the 
profits  of  the  given  business.  However,  shares  are  made 
in  different  denominations,  either  greater  or  less  than 
$100.  A  stock  certificate  is  a  written  acknowledgement 
issued  by  the  company  that  a  given  stockholder  owns 
so  many  shares.  A  single  certificate  may  be  written  for 
one  share  or  for  many. 

When  a  business  is  successful  and  pays  large  divi- 
dends to  stockholders,  the  stock  in  that  company  is  in 
demand,  and  sells  at  or  above  par.  When  a  business  is 
less  successful  and  pays  a  lower  rate  of  dividends,  its 
stock  decreases  in  value. 

In  the  city  stock  exchange,  which  is  the  market  for 
the  stocks  of  all  kinds  of  financial  and  industrial  enter- 
prises, stocks  are  sold  daily  at  varying  prices,  either 
below  or  above  par. 

Stocks  Account  is  charged  at  cost,  for  the  purchase 
of  stocks  by  the  business.  Each  purchase  is  allowed  a 
line  in  which  is  entered  the  date,  name,  and  the  par 
amount  of  the  share,  or  block  of  shares,  in  the  explana- 
tory column;  and  the  cost  in  the  money  column. 

Brokers  who  handle  stocks  freely,  open  separate 
ledger  accounts  for  each  kind  of  stocks.  In  that  case 
the  name  of  the  issuing  company  appears  in  the  title; 
thus,  D.  &  R.  G.  Ry.  Stock. 


38  FINANCIAL  LEDGER   (21-40)— Acc'ts  Payable 

When  a  block  of  stock  is  sold,  an  entry  is  placed  on 
the  credit  of  the  account  on  the  same  line  as  the  debit  for 
the  same  block  of  shares  and  at  the  same  price.  As  it 
often  happens  that  the  stocks  are  sold  for  either  more  or 
less  than  their  purchase  price,  the  difference,  if  the  sel- 
ling price  is  less  than  the  cost,  is  charged,  or  if  greater, 
is  credited,  to  Profit  &  Loss.  Dividends  from  the  stocks 
are  credited  to  Income  From  Stocks  account  in  the  busi- 
ness ledger. 

31.  An  Account  Payable  is  a  ledger  record  showing 
that  we  owe  a  person  or  concern  on  book  account.  The 
title  of  the  account  is  the  name  of  the  person  or  concern 
we  owe.  The  account  is  credited  for  our  obligations  to 
the  concern  when  w«e  assume  them,  and  charged  for  pay- 
ment to  the  concern  when  we  make  them.  When  the 
charges  equal  the  credits,  the  account  may  be  closed  by 
ruling. 

31  B.  When  accounts  payable  are  opened  for  goods 
bought  at  retail,  or  for  services  as  of  transfer  concerns, 
doctors,  mechanics,  etc.,  unless  otherwise  specified,  it  is 
customary  to  settle  about  the  first  of  every  month  for 
the  amounts  credited  during  the  preceding  month. 
When  so  settled,  a  single  charge  for  the  cash  paid  will 
balance  the  month's  credits.  If  a  part  payment  is  made, 
the  amount  paid  should  be  entered  as  a  charge  to  the 
account,  which  continues  open  until  a  settlement,  when 
it  should  be  ruled,  new  business  being  entered  below  the 
ruling. 

31  C.  When  keeping  an  account -payable  for  goods 
bought  at  wholesale,  it  is  usually  better,  and  often  neces- 
sary, to  pay  each  credit  separately.  This  is  done  be- 
cause wholesalers  usually  allow  a  specified  term  of  credit, 
running  from  the  date  of  the  bill.  Thus,  an  invoice  of 
goods  bought  June  19th,  on  account  at  30  days,  should 
be  paid  by  July  19.  Such  terms  of  credit  as  30,  60.  or 
90  days,  or  2,  3,  or  6  months,  are  allowed.  The  difference 
in  time  varies  in  different  lines  of  trade,  or  for  otlu-r 
reasons. 


FINANCIAL  LEDGER   (21-40)— Bills  Payable  39 

Such  accounts  should  show  the  credits  entered  when 
the  invoices  are  allowed,  and  in  the  explanatory  space 
of  the  ledger,  the  term  of  credit,  should  be  entered,  if 
any  special  term  is  granted.  The  payment  of  a  specified 
credit  should  be  charged  on  the  same  writing  line  as  the 
credit,  thus  showing  what  charge  is  cancelled.  It  is  a 
good  plan  to  use  a  sign  "x"  before  the  credit  amounts 
that  have  been  paid,  as  a  convenience  in  easily  picking 
out  the  unpaid  credits  later.  (See  Form  13  I.) 

When  a  deduction  or  allowance  is  made  from  an 
invoice  of  goods  bought,  it  is  a  good  plan  to  charge  the 
allowance  opposite  the  credit  to  which  it  applies  above 
the  writing  line,  so  that  full  settlement  of  the  credit  may 
be  charged  on  the  writing  line.  (See  Form  12  G.) 

31 D.  The  title  Accounts  Payable  is  the  name  of 
the  controlling  account  in  the  financial  ledger  or  financial 
statement  that  represents  the  aggregate  of  all  unpaid 
accounts  in  favor  of  other  persons  or  firms.  Sometimes 
the  titles  Purchase  Ledger  or  Trade  Creditors  are  used, 
meaning  the  same  thing.  When  the  voucher  system  is 
in  operation,  the  title  Vouchers  Payable  bears  the  same 
relation.  The  account  is  credited  at  the  close  of  the 
month,  or  other  posting  period,  for  th'e  total  credits  to 
firms  for  merchandise  bought,  and  charged  for  the  total 
debits  to  firms  on  account  of  payments  or  ^allowances. 
The  balance  shown  by  the  controlling  account  can  be 
verified  by  a  comparison  with  the  total  of  a  list  of  un- 
paid balances  taken  from  the  purchase  ledger  or,  if  a 
*voucher  system  is  used,  from  a  list  of  the  vouchers 
payable. 

32.  Bills  Payable  or  Notes  Payable  is  the  account 
in  which  notes  or  acceptances  due  to  other  persons  or 
firms  are  credited.  The  account  is  credited  for  notes  or 
acceptances  as  issued,  and  it  is  charged  for  all  payments 
on  notes  for  which  the  accounts  have  previously  been 
credited.  The  record  details  of  this  account  are  identi- 
cal with  those  of  Bills  Receivable.  (See  Prin.  25  F  to 
25  H.) 


40  FINANCIAL  LEDGER  (21-40)— Liability  Invty. 

32  B.  The  title,  Bills  Payable,  is  the  name  of  the 
controlling  account  that  represents,  in  the  financial  led- 
ger, the  aggregate  of  outstanding  notes,  when  the  notes 
are  entered  in  *subsidiary  bills  payable  book,  or  bills 
payable  ledger. 

33.  Mortgage  Loans  Payable  is  the  title  for  the  ac- 
count of  long-time  loans  secured  by  mortgages,  kept  in 
the  same  manner  as  Bills  Payable. 

34.  Liability  Inventory  Account.     At  the  close  of 
a   fiscal   period,    certain  liabilities   that   have    not   been 
recorded  should  be  taken  into  account.     Among  these, 
are  accrued  interest  on  notes  or  accounts  payable,  wages 
and  salaries  earned  but  not  yet  paid,  or  other  payments 
to   be  made   for  unrecorded   benefits   already   received. 
These  should  be  listed  in  the  inventory  book  and  their 
total  credited  to  the  account  of  Liability  Inventory.    A 
corresponding  charge  is  then  made  to  the  business  ac- 
count to  which  they  pertain.     At  the  close  of  the  follow- 
ing fiscal  period,  the  inventory  account  is  charged  and 
the  business   accounts  involved   are   credited,   thus   bal- 
ancing out  the  old  inventory,  when  the  new,  or  current, 
inventory  is  entered  as  before. 

35.  Contingent  Liabilities  are  obligations  to  be  met 
should  another  person,  who  is  the  principal  debtor,  fail 
to  pay  them.     They  consist  principally  of  bills  receivable 
discounted  (Prin.  35  B)  and  *accommodation  paper  (Prin. 
35  C).     They  should  be  entered  among  other  liabilities 
in  the  financial  ledger,  as  their  settlement  is  an  important 
matter,   to  be   followed   closely  by  the   accommodation 
party.     A   failure  to   give   due   attention  to   contingent 
liabilities  has  ruined  many  an  easy-going  business  man. 

35  B.  Bills  Receivable  Discounted  account  should 
be  credited  for  the  face  of  all  bills  receivable  which  nave 
been  endorsed  over  to  the  bank  or  to  other  individuals 
for  cash  or  credit.  The  items  should  be  entered  and 
described  as  in  the  Bills  Payable  account.  The  corre- 
sponding charges  are  to  Cash  and  to  Interest  &  Dis- 
count. When  the  notes  are  paid  by  the  makers  to  the 


FINANCIAL  LEDGER  (21-40)—  Conting't  Liabilities        41 

holders,  entries  are  to  be  made  charging  Bills  Receivable 
Discounted  account  and  crediting  Bills  Receivable  ac- 
count. 

If  the  endorsee  fails  to  collect,  the  endorser  is 
obliged  to  pay  the  amount  of  the  indorsed  paper.  In 
that  case  he  charges  Bills  Payable  Discounted  for  the 
notes  returned  to  him,  the  Bills  Receivable  account  stand- 
ing without  any  change. 

35  C.  Accommodation  Paper  account  is  credited  for 
the  face  of  paper  signed  for  the  accommodated  party. 
Each  item  should  be  entered  with  the  same  attention  that 
is  given  to  a  bill  payable.  The  corresponding  charge 
is  to  the  party  accommodated,  thus,  ''John  Smith,  Ac- 
commodation." When  the  paper  is  paid  to  the  holder, 
an  entry  is  made  charging  Accommodation  Paper,  and 
crediting  the  party  who  was  charged  for  the  accommo- 
dation. 

36.  Reserve  Accounts.  Profits  of  the  business,  after 
the  deduction  of  expenses,  may  be  accounted  for  in  two 
general  ways,  depending  on  the  disposition  made  of  the 
profits : 

(1)  In  a  private  business,  it  is  usual  to  carry  the 
amount  of  net  profit  to  the  credit  of  the  Capital  account, 
thus  increasing  the  credited  investment  of  the  owner  or 
owners,   or  it  may  be   carried  to  separate   drawing  or 
private  accounts  of  the  owner  or  owners,  to  be  drawn 
out  at  their  option,  without  increasing  the  capital. 

In  the  case  of  a  stock  company,  the  same  effect  is 
secured  by  apportioning  the  profits  to  the  *stockholders 
in  a  Dividend  account  which  is  closed  when  the  divi- 
dends are  paid. 

(2)  Before  allowing  all  apparent  profits  to  be  with- 
drawn, the  prudent  directors  of  a  business  may  find  it 
advisable  to  keep  or  reserve  some  of  the  profits  in  the 
business,  either  as  an  offset  against  diminishing  capital, 
through  depreciation  in  value  of  property  owned,  or  as 
an  offset  against  bad  debts,  or  as  an  addition  to  the  gen- 
eral resources  of  the  business.     Such  amounts  reserved 


42  FINANCIAL  LEDGER   ( 21-40 ) —Reserve  Acc'ts 

are  represented  by  Reserve  accounts,  which  receive  credit 
for  the  amount  retained  in  the  business.  The  cash  or 
property  reserved  is  included  in  the  aggregate  of  the 
asset  accounts  which  balances  the  credit  in  the  Reserve 
account,  in  the  same  way  that  the  accounts  of  the  re- 
mainder of  the  assets  (less  liabilities)  balances  the  Capi- 
tal account.  Reserve  accounts  have  the  same  physical 
relation  to  the  business  that  the  Capital  account  has,  and 
indeed  they  are  really  special  capital  accounts. 

36  B.  Reserve  for  Depreciation  account  is  credited 
for  the  loss  sustained  through  the  diminishing  value  of 
fixed  property  through  ordinary  wear.  The  credits  to 
this  account  should,  in  the  explanatory  column,  show 
the  particular  property  account  that  each  item  pertains 
to,  if  one  reserve  for  depreciation  account  is  kept  for  all 
property.  If  the  number  of  entries  is  great  enough,  or  if 
a  close  classification  is  desired,  a  separate  reserve  account 
may  be  opened  for  each  property  account ;  as,  Reserve  for 
Depreciation  (Plant),  Reserve  for  Depreciation  (Deliv- 
ery Equipment),  etc.  These  accounts  should  show 
enough  reserved  to  equal  the  difference  between  the  cost 
of  the  property  and  its  present  market  value.  The  credit 
to  Reserve  for  Depreciation  account  is  balanced  by  a 
charge  against  the  revenues  in  the  business  ledger.  De- 
preciation is  an  expense,  as  real  as  the  payment  of  rent 
or  salaries  and  should  be  charged  regularly,  regardless 
of  whether  the  business  is  being  run  at  a  profit  or  at  a 
loss. 

When  any  given  building  or  machinery  carrying  a 
reserve  for  depreciation,  is  sold,  the  entry  of  the  sale 
should  contain  a  charge  to  the  Reserve  for  Depreciation 
for  an  amount  to  balance  the  credit  in  the  reserve  account 
applying  to  the  sold  property. 

36  C.  Reserve  for  Doubtful  Accounts.  When  an 
examination  of  the  accounts  receivable  discloses  the  fact 
that  any  of  the  accounts  cannot  be  collected,  or  that 
losses  will  probably  occur  in  enforcing  collection,  it  is 
apparent  that  the  total  of  accounts  receivable  balances 


FINANCIAL  LEDGER   (21-40)— Surplus,  Undiv.  Profits     4^ 

is  greater  than  the  asset  value  of  the  accounts.  This 
estimated  shrinkage  in  value  should  be  offset  by  an 
amount  taken  from  profits  and  credited  to  an  account  of 
Reserve  for  Doubtful  Accounts.  The  amount  of  this  re- 
serve should  be  watched  and  revised  annually  to  an 
amount  equal  to  the  probable  losses  to  be  incurred 
through  bad  debts.  When  such  reserve  has  been  set  up 
at  the  end  of  a  fiscal  period,  the  actual  losses  incurred 
from  accounts  becoming  worthless  in  the  following  period 
should  be  charged  to  the  reserve  account  and  not  to  the 
Profit  &  Loss  account. 

36  D.  General  Reserve  Accounts.  This  account  may 
be  used  to  contain  credits  or  reserve  for  depreciation  or 
bad  debts,  or  to  meet  any  future  contingencies  of  the 
business,  or  it  may  be  used  to  increase  the  amount  of 
working  capital.  The  objectionable  feature  of  carry- 
ing reserves  beyond  business  needs  is,  that  such  reserves 
may  be  made  without  the  knowledge  or  consent  of  certain 
investors,  who  would  be  entitled  to  a  larger  share  of 
profits,  if  such  profits  were  not  retained  in  the  business. 

36  E.  Surplus  Account  is  an  account  credited  for 
cash  profits  reserved  from  time  to  time  to  increase  the 
working  capital  of  the  business  and  to  provide  reserve 
capital  to  meet  losses  that  are  not  chargeable  to  other 
revenues.  The  report  of  the  United  States  comptroller 
of  the  currency  shows  statements  from  many  banks  that 
have  surplus  accounts  equal  to,  or  even  greatly  in  excess, 
of  the  capital  stock.  Any  business  concern  other  than  a 
bank  should  build  up  a  surplus  if  there  is  risk  of  loss 
through  a  wasting  away  of  the  assets. 

36  F.  The  Undivided  Profits  Account  is  credited  for 
part  of  the  profits  neither  paid  to  owners  of  the  business 
nor  placed  in  any  permanent  reserve  account,  but  retained 
until  definitely  disposed  of.  The  account  should  be 
charged  when  disposition  is  made.  When  it  is  the 
policy  or  obligation  to  pay  a  fixed  annual,  semi-annual  or 
quarterly  dividend  regularly,  a  fund  to  meet  such  divi- 
dends may  be  taken  out  of  undivided  profits,  when  the 


44  FINANCIAL  LEDGER  (21-40)— Capital  Acc'ts 

current  profits  of  a  dividend  period  are  insufficient  to 
meet  the  required  dividend. 

37.  The  Capital  Account  of  an  Individual  Proprie- 
torship is  the  account  credited  for  the  money  claims  or 
property  (assets)  invested,  or  that  the  proprietor  owns 
as  component  parts  of  the  business  concern  for  which  the 
books  are  kept.  The  amount  of  this  credit  is  diminished 
by  the  amount  of  any  liabilities  that  are  to  be  paid  out 
of  the  assets.  It  shows,  therefore,  the  net  worth  of  the 
concern,  though  not  necessarily  the  net  worth  of  the 
owner,  who  may  or  may  not  have  his  entire  possessions 
included  in  the  concern. 

The  capital  of  the  concern  is  its  cash  and  property, 
less  debits,  represented  in  the  financial  accounts.  Capital 
should  be  distinguished  from  the  Capital  account. 

The  Capital  account  is  a  credit,  because  it  is  a  liabil- 
ity of  the  concern  to  the  owner ;  it  equals  the  net  amount 
of  assets  standing  in  all  other  accounts  of  the  financial 
ledger. 

37  B.  The  revenues  and  incomes  of  the  business  in- 
crease the  capital,  and  the  expenses  diminish  it.  If  both 
were  credited  or  charged  to  the  Capital  account,  as  they 
occur,  the  Capital  account  would  at  all  times  represent 
the  worth  of  the  business.  This  may  be  done,  but  the  cus- 
tom is  to  credit  the  revenues  and  incomes  and  charge  the 
expenses  to  certain  nominal  accounts  which,  once  a  year 
or  other  period  (called  the  fiscal  period),  are  combined 
into  one  result  and  carried  to  the  Capital  account.  Thus, 
the  Capital  account  of  an  individual  proprietorship  shows 
the  exact  capital  or  net  worth  of  a  business  only  once  a 
year,  the  nominal  accounts  showing  the  increase  or  de- 
crease in  that  capital  during  the  intervening  time. 

37  C.  As  a  genonil  rule,  in  the  larger  business  con- 
cerns, as  well  as  in  many  of  the  smaller  ones,  the  capital 
of  a  concern  is  fixed  at  an  amount  not  to  be  increased  or 
diminished  by  the  profits  and  losses  of  the  business  opera- 
tions. In  this  case,  the  amount  of  the  net  profit  of  loss  of 
a  fiscal  period  is  not  carried  from  the  nominal  accounts 


FINANCIAL  LEDGER   (21-40)— Capital  Acc'ts  45 

to  the  Capital  account,  but  is  carried  to  the  proprietor's 
Drawing  account,  an  account  credited  for  amounts  which 
he  may  draw  out  of  the  concern  for  his  personal  use. 

37  D.  The  title  of  the  capital  account  is  written  in 
various  ways;  thus,  John  Smith,  Capital;  John  Smith, 
Proprietor;  John  Smith,  Investment;  John  Smith,  Stock; 
or  simply  John  Smith.  The  title  may  also  be  unpersonal, 
as  Stock  or  Capital.  The  form  John  Smith,  Capital,  is 
preferred.  The  position  assigned  to  the  capital  account 
in  the  ledger  varies  with  different  bookkeepers.  It 
seems  preferable  to  make  it  the  last  account  in  the  finan- 
cial ledger,  wherein  asset  accounts  appear  first,  in  the 
order  of  their  convertibility,  followed  by  liability  ac- 
counts in  the  order  of  their  immediate  or  remote  demand 
for  payment,  the  last  of  these  being  the  Capital  account. 

This  is  also  the  most  convenient  place  for  reference 
when  making  a  trial  balance  or  a  financial  statement; 
especially  since,  once  a  year,  all  the  nominal  accounts 
following  the  financial  ledger  are  closed,  leaving  the 
ledger  intact  to  that  point. 

37 E.     Forms  of  individual  Capital  account: 
Forms   10  E   and   10  P.      The   account   is   here   credited 
for  investment   and    for  revenues  and  charged  for  ex- 
penses item  by  item.     The  balance  of  this  account,  taken 
at  any  time,  is  the  amount  of  net  worth. 

Form  10  H.  The  Capital  account  remains  as  at  the 
beginning  of  the  fiscal  period,  while  the  revenues  are 
credited  in  a  nominal  account  (Form  10  I)  and  the  ex- 
penses in  another  (Form  10  J). 

The  same  accounts,  copied  on  the  opposite  page, 
show  the  revenue  (Form  10  M)  and  the  Expense  (Form 
10  N)  carried  to  Profit  &  Loss  (Form  10  0)  from  which 
account  the  balance  is  carried  to  the  Capital  account 
(Form  10  L).  This  account,  when  balanced,  exhibits  the 
same  amount  as  did  Form  10  F  by  the  former  process. 

If,  after  showing  the  net  profit  of  $4.75,  (Form  10  0) 
it  had  been  decided  not  to  increase  the  capital,  but  to 
withdraw  the  profits,  the  balance  of  the  Profit  &  Loss 


46  FINANCIAL  LEDGER  (21-40)— Capital  Acc'ts 

account  would  have  been  carried  to  the  credit  of  another 
account  entitled,  Charles  Burton,  Drawing.  This  account 
would  be  charged  later  for  the  amounts  drawn  out  by 
Burton  for  his  personal  expenditures. 

38.  The  Capital  Accounts  of  a  Partnership  are  cred- 
ited for  the  investments  of  each  of  the  partners  separ- 
ately.    Thus,  if  John  Smith  and  Lewis  Jones  enter  into 
partnership,  on  opening  the  firm  books,  an  account  en- 
titled, John  Smith,  Capital,  or  John  Smith,  Partner,  will 
be  credited  for  the  capital  which  he  invests,  as  is  done 
in  the  capital  account  of  a  sole  proprietor;  an  account 
entitled,  Lewis  Jones,  Capital,  or  Lewis  Jones,  Partner, 
will  be  similarly  credited  for  the  capital  contributed  by 
the  latter.     If  there  are  several  partners,  a  like  entry 
will  be  made  crediting  the  capital  account  of  each. 

When  the  Profit  and  Loss  account  is  made  up  at  the 
close  of  the  fiscal  period,  the  net  profit  or  loss,  in  the 
absence  of  any  agreement  to  the  contrary,  is  divided 
equally  among  the  partners.  If  there  is  a  special  agree- 
ment as  to  the  proportion  each  is  entitled  to,  the  profits 
are  divided  according  to  that  agreement,  and  the  part 
belonging  to  each  partner  is  carried  to  his  Capital  ac- 
count or  to  his  Drawing  account  as  explained  in 
Prin.  37  C. 

38  B.  Agreement  of  Partnership.  The  relations  be- 
tween partners  are  so  likely  to  be  misunderstood,  and  the 
power  of  one  partner  to  involve  the  others  in  undesirable 
business  obligations  is  so  great,  that  a  mutual  agreement 
in  writing  should  be  made  to  govern  their  actions  and 
authority  as  affecting  one  another. 

39.  The  Capital  Account  of  a  Corporation  is  cred- 
ited for  the  amount  of  the  authorized  capital  of  the  con- 
cern.    If  this  amount  is  paid  into  the  company  in  cash 
or  property  by  the  investors  when  the  concern  is  estab- 
lished,   the    opening    entry    is    very    simple — the    asset 
accounts  are  charged ;  and  the  Capital  account  is  credited. 
But  this  condition  rarely  exists,  for  the  reason  that  the 
entire   capital   cannot   ordinarily   be    secured   from   the 


FINANCIAL  LEDGER  (21-40)— Capital  Acc'ts  47 

investors  at  one  time,  but  is  frequently  collected  in  in- 
stallments. Furthermore,  subscribers  for  the  entire 
amount  of  the  authorized  capital  stock  may  not  be  found 
at  the  time  of  organization.  Again  the  legal  obligations 
of  each  of  the  members  to  the  company,  and  the  obliga- 
tion of  the  corporation  to  the  state  require  special  records 
to  guide  in  their  enforcement.  Thus,  if  the  capital  is  not 
all  paid  in,  the  Capital  Stock  account  should  be  dimin- 
ished by  certain  accounts,  the  debits  of  which  show  how 
much  of  the  amount  credited  to  the  Capital  Stock  account 
exceeds  the  real  capital  of  the  business.  The  principal 
accounts  of  this  nature  are  entitled,  Subscriptions,  Un- 
subscribed Stock,  Unissued  Stock,  and  Treasury  Stock. 

Profits  or  losses  are  not  carried  to  the  Capital  Stock 
account  of  a  corporation,  but  are  carried  to  Reserve, 
Surplus,  Dividend,  or  Assessment  account  in  the  financial 
ledger. 

39  B.  After  a  sufficient  number  of  subscriptions  are 
secured  to  enable  a  corporation  to  organize,  an  entry  is 
made  charging  Subscriptions  account  and  crediting  Capi- 
tal Stock  account.  If  the  subscriptions  fall  short  of  the 
proposed  capital,  the  amount  not  subscribed  is  charged 
to  an  account  of  Unsubscribed  Stock.  These  two  debits 
equal  the  amount  of  credit  to  the  Capital  Stock  account. 
When  they  are  posted,  the  Capital  Stock  account  will 
stand  without  further  change,  unless  the  capital  stock 
is  increased  or  diminished  by  some  future  action. 

39  C.  The  Share  of  Each  Stockholder  in  the  capital 
stock  must  be  recorded  also.  If  there  are  few  stock- 
holders, and  these  do  not  expect  to  transfer  their  shares 
actively,  a  line  in  the  Capital  Stock  account  may  be  given 
to  each  stockholder,  showing  his  name,  and  the  amount 
to  his  credit.  The  amount  standing  to  the  debit  of  Un- 
subscribed Stock  will  also  be  given  a  line  following  these 
credits,  making  the  total  equal  to  the  entire  capital  as 
shown  by  the  articles  of  incorporation. 

If  a  stockholder  transfers  his  shares  to  another  per- 
son, a  debit  opposite  his  credit  is  entered,  and  the  person 


48  FINANCIAL  LEDGER  (21-40)— Capital  Acc'ts 

receiving  th  transferred  shares  is  credited  on  the  next 
line  below  as  before.  If  unsubscribed  stock  is  taken, 
the  line  in  the  Capital  Stock  account  credited  for  unsub- 
scribed stock  is  debited  for  the  full  amount,  and  two 
credits  are  entered — one  for  the  new  stockholder,  and 
one  for  the  remainder  unsubscribed.  Thus,  the  Capital 
Stock  account  shows  the  names  of  stockholders  and  the 
amount  of  stock  belonging  to  each,  together  with  the 
unsubscribed  portion. 

39  D.  When  there  are  many  stockholders,  and  when 
the  shares  are  transferred  from  one  holder  to  another 
quite  freely,  an  auxiliary  Stock  Ledger  should  be  used 
which  will  contain  separate  accounts  with  all  stock- 
holders. Each  is  credited  for  his  holdings,  and  charged 
for  his  transfers  of  stock  to  others.  It  should  be  remem- 
bered that  the  transfer  of  stock  from  one  shareholder  to 
another  does  not  involve  any  change  of  values  so  far  as 
the  company  is  concerned,  but  merely  shows  who  is  en- 
titled to  the  benefits  of  the  stock  and  the  amount  held. 

The  total  credits  in  the  stock  ledger  should  be  equal 
to  the  credits  of  the  Capital  Stock  account,  less  the 
amount  standing  in  undescribed  or  treasury  stock. 

Recapitulation  21  to  40.  The  financial  accounts  pro- 
vide the  data  for  the  financial  statement  or  detailed 
statement  of  the  worth  of  the  business.  They  are  kept 
in  the  financial  ledger  or  financial  division  of  the  general 
ledger.  These  accounts  are  divided  into  asset  accounts 
and  liability  accounts. 

Asset  accounts  begin  with  accounts  of  cash,  followed 
by  accounts  of  property,  arranged  in  the  order  of  their 
convenient  convertibility  into  cash  as  follows:  (1)  cash; 
(2)  accounts  and  bills  receivable,  bonds,  and  mortgage 
loans;  (3)  inventory  of  merchandise  and  other  floating 
assets;  (4)  equipment,  including  furniture  and  fixtures, 
machinery  and  tools,  etc.;  (5)  real  property;  (6)  in- 
tangible assets,  including  good  will,  franchise,  patent 
rights,  etc. 

The   liability   accounts   follow:     They   include,    (1) 


PROFIT  AND  LOSS  STATEMENTS   (41-50)  49 

accounts,  bills,  mortgages  and  bonds  payable;  (2)  liabil- 
ity inventory;  (3)  accounts  of  contingent  liabilities;  (4) 
reserve  accounts;  (5) accounts  of  capital  investment. 

The  Cash  account  should  be  kept  in  such  a  way  as 
to  show  conveniently  at  any  time,  the  amount  of  cash 
on  hand. 

The  Inventory  account  should  show  the  net  totals 
of  all  floating  assets  as  taken  from  an  inventory  made  at 
the  close  of  each  fiscal  period,  where  cost  price  is  dimin- 
ished by  the  amount  of  any  reduction  in  the  value  of  the 
property. 

The  accounts  of  fixed  property  should  show,  as  led- 
ger debits,  the  cost  of  all  items.  Depreciation  in  the 
value  of  fixed  property  should  be  offset  by  appropriate 
Reserve  accounts. 

Intangible  assets  should  be  entered  in  their  respec- 
tive accounts  at  cost,  and  diminishing  value  offset  by 
credits  in  the  same  accounts. 

The  liabilities  should  follow  in  the  order  of  their 
necessity  for  settlement. 

The  difference  between  the  total  of  assets  and  liabili- 
ties, is  the  value  or  worth  of  the  ownership,  either  in  the 
form  of  investment  or  profits,  which  the  proprietors  have 
in  the  business. 

41.  Profit  and  Loss  Statements.  A  profit  and  loss 
statement  may  consist  of  a  very  simple  showing  of  the 
sources  and  amounts  of  income  or  revenue,  diminished 
by  a  showing  of  kinds  and  amounts  of  expenses,  leaving 
as  a  remainder,  the  net  profit  or  loss  for  the  given  period 
under  consideration.  (See  Form  10  R.)  It  may  be  more 
complicated,  showing  the  revenues,  incomes,  and  ex- 
penses classified  in  greater  detail.  (Forms  12  N,  and 
Forms  6  to  9).  One  essential  to  be  insisted  on  at  all 
times  is  that  the  statement  must  not  show,  as  profit,  any 
income  or  revenue  resulting  from  a  reduction  of  the  capi- 
tal of  the  business,  as  shown  by  the  books  at  the  begin- 
ning of  the  fiscal  period,  and  must  not  show,  as  loss,  any 


50         P.  &  L.  STATEMENTS   (41-50)—  Revenues,  Incomes 

expenditures  for  property  that  remains  in  the  business 
as  an  asset. 

41  B.  Profits  are  derived  from,  (1)  Revenues,  (the 
collections  coming  to  the  business  from  the  regular  busi- 
ness processes,  such  as  sales  and  services  performed) ; 
(2)  Incomes,  (the  collections  coming  to  the  business  from 
the  use  of  capital,  such  as  interest  and  rents) ;  (3)  Un- 
classified Profits,  or  returns  from  irregular  or  accidental 
sources,  as,  for  instance,  the  amounts  realized  from  specu- 
lation and  subsidy. 

41 C.  Losses  are  expenditures  which  result  in  a 
diminishment  of  the  assets  of  the  business.  They  are 
divided  into  (1)  expenses;  (2)  unclassified  losses. 

Expenses  are  the  outlays  for  things  to  be  consumed 
in  carrying  on  the  business.  Such  outlays  may  be  for 
rent,  light,  heat,  fuel,  insurance,  interest,  taxes,  hired 
help,  and  like  things,  also  for  such  property  as  coal  for 
fuel,  office  stationery,  office  blank  books,  and  such  other 
things  as  would  be  consumed  within  the  fiscal  period,  or, 
if  lasting  over,  would  be  so,  damaged  by  use  as  to  be 
unsalable.  Unclassified  losses  arise  from  irregular 
causes,  such  as  theft,  gifts,  fires,  accidents,  or  specula- 
tions. 

41  D.  In  preparing  a  profit  and  loss  statement,  the 
first  distinction  to  be  noted  is  that  revenues,  incomes,  and 
unclassified  profits  are  (in  the  American  form)  carried 
to  the  right  hand,  or  credit  column,  and  the  expenses  and 
unclassified  losses  to  the  left  hand,  or  debit  column.  (The 
English  form  reverses  these  columns.) 

The  difference  between  the  two  columns,  or  the  net 
profit  or  loss,  is  entered  as  a  balance,  and  the  two  columns 
are  then  footed  and  ruled.  (See  Form  10  R.) 

A  second  section  may  be  added,  by  carrying  the  net 
profit  or  loss  below  the  ruling,  and  balancing  it  by  an 
entry  showing  the  disposition.  (See  last  section,  Form 
12  N.)  Such  a  statement  is  often  sufficient,  but  more 
detail  is  ordinarily  desirable,  or  even  necessary,  especially 
in  an  «  \t.  nsive  business,  where  the  different  classes  of 


P.  &  L.  STATEMENT   (41-50)— Trading  &  Mfg.  Profit       r,i 

profits  and  losses  are  given  separate  sections  in  the  state- 
ment as  discussed  in  Prin.  42  to  49. 

42.  Trading   Profit.      The   principal   revenue   of   a 
trading  business  is  derived  from  merchandise  sold.     To 
exhibit  this  revenue,  a  trading  statement  is  drawn  up, 
in  the  first  section  of  the  profit  and  loss  statement  (See 
Form  12  N).     This  section  shows,  in  the  credit  column, 
the  net  amount  of  collections  made,  or  receivable,  from 
merchandise  sold  during  a  given  fiscal  period.     Against 
the  proceeds   of  merchandise   sold,   are   entered   in   the 
debit  column,  the  cost  of  the  merchandise  sold,  meaning 
by  cost,  the  price  paid  plus  freight  and  other  expenses 
incurred  in  connection  with  the  goods,  up  to  the  time 
when  they  are  laid  down  in  the  storeroom  for  sale.    The 
difference  between  the  net  amount  of  merchandise  sold 
and  the  cost  of  the  merchandise  sold  is  entered  as  a  bal- 
ance, with  the  explanation,  Gross  Trading  Profit. 

The  trading  statement  is  then  ruled,  and  the  gross 
trading  profit  is  carried  down  to  the  credit  side,  below 
the  ruling,  to  be  further  increased  by  other  revenues  and 
incomes  (if  any)  and  to  be  diminished  by  such  expenses 
as  may  be  incident  to  any  kind  of  business,  as  explained 
in  Prin.  46-49. 

43.  Manufacturing   Profit.     The   principal   revenue 
of  a  manufacturing  business,  like  that  of  a  trading  busi- 
ness, is  derived  from  the  sale  of  merchandise.     The  net 
merchandise  sold  of  a  fiscal  period  is  entered  to  the  credit 
of  the  trading  section  of  the  profit  and  loss  statement, 
and  a  corresponding  entry  of  the  cost  of  merchandise  sold 
is  entered  in  the  debit  column ;  by  so  doing,  the  difference 
may  be   entered   as   a  balance,   called,   "Gross   Trading 
Profit,"  to  be  carried  down  to  a  following  section.     This 
may  be  increased  by  other  revenues  or  incomes,  if  any, 
and  reduced  by  such  expenses  or  losses  as  may  be  inci- 
dent to  any  kind  of  business,  as  explained  in  Prin.  46-49. 

The  trading  section  of  a  manufacturing  profit  and 
loss  statement  may  be  the  first  or  the  second  section  of 
the  statement.  Its  position  depends  on  whether  the  de- 


52      P.  &  L.  STATEMENT  ( 41-50 )  —Service  &  Financial  Profit 

tails  of  the  manufacturing  (which  include  items  showing 
cost  of  material,  labor,  and  manufacturing  expenses), 
can  be  conveniently  entered  on  a  first  section,  (See  Form 
6)  or  whether  they  are  so  complex  and  diversified  as  to 
require  a  separate  manufacturing  statement,  supple- 
mentary to  the  profit  and  loss  statement. 

44.  Service   Profit.     The   principal   revenues    of   a 
service  business  include  the   earnings  from  its  sales  of 
service,which  are  carried  to  the  first  section  of  the  profit 
and   loss   statement   from   the    accounts    showing    their 
amount. 

Thus,  in  a  livery  and  transfer  business,  livery  hire, 
stable  board,  drivers  and  transfer  service  might  include 
the  principal  earnings;  a  hotel  might  classify  lodging, 
table  board,  news  stand,  pool  room,  etc. ;  a  railroad  must 
classify  passenger,  freight,  express,  and  mail  earnings, 
as  separate  items.  These  revenues  are  entered  to  the 
credit  column  (See  Form  7)  of  the  first  section  of  the 
statement,  and  a  balance,  called  Gross  Earnings  is 
carried  down  below  the  ruling,  to  be  increased  by  other 
incomes  and  diminished  by  expenses,  incident  to  any  kind 
of  business,  as  explained  in  Prin.  46-49. 

45.  Financial  Profits.     The  principal  incomes  of  a 
financial  business  are  derived  from  the  loan  of  money  or 
credit,  and  the  rent  of  property,  or  other  earnings,  de- 
rived from  the  use  of  the  firm's  capital  by  others.    Such 
incomes  are  entered  to  the  credit  column  of  the  profit 
and  loss  statement,  followed  by  the  revenues  for  such 
services  as  generally  are  included  in  financial  business.. 
The  expenses  are  entered  in  the  left  or  debit  column,  and 
the  difference  or  "net  profit    for  distribution "  is  carried 
down  to  the  second  section. 

46.  Selling    Expenses.     Having    found   the    gross 
trading,  service  or  financial  profit,  tho  first,  of  the  three 
general  classes  of  expense  to  be  deducted  in  the  typical 

^statement,  is  the  group  comprising  Selling  Expenses. 
This  group  m;iy  ocr-npy  a  section  in  the  statement,  or 
I...  included  in  tin-  s;nm-  section  with  others,  depending 


P.  &  L.  STATEMENT  (41-50)— Expenses  53 

on  the  extent  of  primary  classification.  Among  these, 
may  be  included  advertising,  commissions  paid,  trans- 
portation on  shipments  to  customers  prepaid  but  not 
charged,  salesman's  and  shippers'  salaries  and  expenses, 
and  any  other  expenditures  for  promoting  or  effecting 
sales.  When  these  expenses  are  deducted  from  the  gross 
profit,  the  remainder  is  the  net  financial,  service,  or  trad- 
ing profit  as  the  case  may  be. 

47.  Office  Expense.     After  deduction  of  selling  ex- 
penses, a  group  called  Office  Expenses,  Administrative 
Expenses,    or    Overhead   Expenses,   is   to    be    deducted. 
These  include  the  cost  of  management.    Among  them  are, 
office  salaries,  books  and  stationery,  postage,  insurance, 
taxes,  light,  heat,  and  other  expenses  not  directly  enter- 
ing into  the  production  of  the  utility  sold,  or  of  expenses 
incurred  in  securing  customers.     After  this   deduction, 
there  remains  the  Ordinary  Business  Profit. 

48.  Capital  Expense   and  Income.    Having   found 
the  ordinary  business  profit,  the  group  of  expenditures 
chargeable  to   Capital  Expenses  follow.     These  include 
interest  for  money  used  for  the  support  of  the  business, 
and  discounts  on  bonds  or  stocks  of  the  business  that 
have  ben  sold.     In  this  division  also  appears  the  interest 
credits  arising  from  surplus  money  loaned ;  some  concerns 
frequently  having  a  large  surplus  of  cash  in  the  fall  and 
winter,  making  them  lenders,  while  they  are  borrowers  in 
the  spring  and  summer. 

49.  Special  Income  and  Expense.    When  capital  is 
invested  in  property  which  is  not  a  necessary  part  of  the 
business  organization,  but  is  held  either  for  the  income 
it  produces,  or  to  be  disposed  of  at  a  favorable  time,  or 
for  speculation,  the  incomes^  from  the  property  and  the 
expenses  of  its  upkeep  are  considered  in  one  item  called 
Income  and  Expense  (of  Property).     This  account  shows 
the  net  profit  or  loss  arising  from  the  given  property 
during  the  fiscal  period.     If  the  special  income  exceeds 
the  special  expense,  the  difference  is  carried  to  the  right, 
or  profit,  column  of  the  profit  and  loss  statement ;  if  the 


54  P.  &  L.  STATEMENTS   (41-50)— Model  Forms  ' 

special  expense  exceeds  the  special  income,  it  is  carrie'd 
to  the  left,  or  loss,  column. 

50.  After  deduction  of  the.  above,  (Prin.  46-49)  there 
remains  the  Net  Profit  for  Distribution. 

Note. — The  disposal  of  the  net  profit  for  distribution 
may  be  shown  on  the  Profit  and  Loss  statement  as  in 
Form  7  D  or  8  E. 

In  making  a  Profit  and  Loss  statement,  the  book- 
keeper should  remember  that  not  all  of  the  divisions  out- 
lined in  Art.  42  to  49  necessarily  appear  in  all  cases. 

While  there  are  business  concerns  in  which  the  classi- 
fication of  profits  and  losses  is  of  no  practical  importance 
whatever,  such  is  not  generally  the  case.  Such  a  classifi- 
cation should  go  into  detail,  to  such  an  extent  that  it 
will  give  exact  information  on  all  elements  of  profit  and 
loss  that  may  be  controlled,  or  even  modified,  by  the 
management. 

The  steps  outlined  above  provide  the  accountancy 
basis  for  an  exhibition  of  the  following  matters  vital  to 
the  interests  of  any  business  organization  conducted  for 
profit : 

(1).  The  volume  of  the  sales  of  goods  during  a  given 
period,  the  percentage  of  sales,  as  compared  with  capital 
and  with  the  cost  of  sales,  and  the  percentage  of  profit, 
as  compared  with  sales,  and  with  the  investment. 

(2).  The  cost  and  percent  cost  of  effecting  sales  or 
securing  a  market. 

(3).  The  cost  and  percent  cost  of  general  direction, 
management  and  control. 

(4).  The  cost  and  percent  cost  of  the  capital  or 
credit  used  to  conduct  the  business. 

Illustration  of  Profit  and  Loss  Statements.  In  order 
to  illustrate  the  general  resemblances  in  the  business 
statements  of  representative  kinds  of  business,  and  to 
draw  general  distinctions  between  them,  we  refer,  in  the 
following  paragraphs,  to  model  statements  suitable  for 
the  following  enterprises  that  have  to  do  with  a  loaf  of 
bread  from  the  time  the  wheat  is  produced  to  the  time 


P.  &  L.  STATEMENTS   (41-50)— Model  Forms  55 

when  the  bread  appears  on  the  table.  The  lines  of  busi- 
ness involved  are:  (1)  first  production;  (2)  milling; 
(3)  transportation;  (4)  wholesaling;  (5)  retailing;  (6) 
household;  (7)  banking. 

The  student  will  bear  in  mind  that  the  business  state- 
ments used  for  illustration  can  be  made  only  from  care- 
fully kept  business  accounts.  Yet  any  business  man, 
whether  he  can  keep  books  or  not,  should  be  able  to  read 
and  understand  the  points  to  be  looked  for  in  a  business 
statement. 

50  B.  The  wheat  first  appears  as  the  production  of 
the  wheat  grower.  At  the  close  of  the  year,  having  kept 
an  account  of  the  expenses  entering  into  the  wheat  crop, 
he  is  able  to  show  the  entire  cost  of  the  crop  in  an  exhibit 
similar  to  the  first  section  of  Form  6.  Instead  of  the 
items  there  given,  the  main  divisions  of  seed,  labor,  and 
farm  expenses  (including  ground  rent,  supplies,  depre- 
ciation on  machinery,  harvesting  expenses,  and  the  like) 
would  be  used.  The  result  would  be  the  production  cost. 

A  second  section  showing  the  gross  trading  profit, 
in  similar  form  to  6  B  may  follow.  All  general  expenses 
may  be  included  in  the  detail  desired  in  one  section,  in- 
stead of  being  divided  as  in  Form  6  C  to  6  E. 

Having  deducted  the  general  expenses,  the  remainder 
shows  the  net  profit  for  the  year. 

50  C.  Form  No.  6.  The  next  statement  taken  up  is 
that  of  the  miller  who  converts  the  wheat  into  flour. 
This  is  a  manufacturing  business,  and  the  results  of  the 
bookkeeping  for  a  year  should  be  condensed  into  a  Profit 
and  Loss  statement  similar  to  the  given  form.  Note  that 
the  first  section  (Manufacturing)  gives  in  general  items 
the  costs  entering  into  the  production  of  flour  and  other 
output.  These  costs  are  taken  from  a  complete  record 
of  the  payments  and  expenses,  the  total  of  which  con- 
stitutes the  "cost  of  product." 

The  trading  section  shows  that  there  was  billed  out 
during  the  year,  mill  product  valued  at  $26943.87,  but 
that  the  mill  took  back  product  amounting  to  $1497.83, 


56  P.  &  L.  STATEMENTS   (41-50)— Model  Forms 

leaving  net  sales  $25464.04.  The  cost  of  these  sales  is 
found  by  adding  to  the  inventory  at  begining  of  year, 
$5291.63,  the  cost  of  the  year's  product,  $22967.39,  and 
from  the  sum,  deducting  the  inventory  of  stock  on  hand, 
$9647.83,  leaving  $18611.19,  the  net  cost  of  the  product 
sold. 

The  difference,  or  gross  trading  profit,  $6852.85,  is 
carried  down  to  the  next  section.  Against  this  are  en- 
tered selling  expenses,  office  expenses  and  capital  ex- 
penses, given  in  some  detail. 

The  final  result,  after  all  deductions,  is  the  "net 
profit  for  the  year." 

50  D.  Form  No.  7.  The  railroad,  which  carries  the 
flour  to  the  wholesale  house,  secures  its  profit  from  carry- 
ing passengers,  freight,  express  and  mail.  The  primary 
accounts  of  income  and  expenditures  in  a  large  under- 
taking of  this  kind  may  number  200  more  or  less,  but 
these  primary  accounts  are  brought  together  into  general 
accounts,  of  which  the  items  in  the  statement  are  repre- 
sentative. First,  are  listed  four  items  of  income;  the 
first  is  from  ticket  sales ;  the  second  from  freight  charges ; 
the  third,  from  an  express  company  for  carrying  express ; 
and  the  fourth,  from  the  government  for  carrying  mail. 
These  combined  produce  the  gross  earnings  which  are 
carried  down  to  the  next  section. 

Against  the  gross  earnings  are  charged  five  general 
divisions  of  operating  expenses. 

A  proper  understanding  of  the  operating  expenses 
necessitates  some  knowledge  of  railroading.  Under  the 
regulation  of  railway  accounting  through  the  Interstate 
Commerce  Commission,  each  of  the  five  items  represents 
a  definite  kind  of  charges  applying  to  all  roads.  For 
example,  the  first  expense,  Maintenance  of  Right  of  "Way 
and  Structures,  represents  a  group  of  over  twenty  pri- 
mary charges;  among  these  are,  cost  of  repairing  and 
replacing  ballast,  ties,  rails,  bridges,  buildings,  etc.  The 
fourth  expense,  Transportation  Expenses,  include  about 
fifty  primary  charges,  among  them  fuel,  water,  lubricants, 


P.  &  L.  STATEMENT  (41-50)— Model  Forms  57 

wages  to  conductors,  brakemen,  switchmen,  telegraph 
and  telephone  operation,  etc. 

After  deducting  operating  expenses  from  the  gross 
earnings,  there  remains  the  net  earnings  which,  in  the 
following  section,  are  diminished  by  the  capital  charges. 
The  item,  * '  Interest  on  Bonds, ' '  in  this  group,  arises  from 
the  fact  that  a  large  part  of  the  working  capital  of  many 
railroads  is  provided  by  the  sale  of  bonds  on  which  in- 
terest must  be  paid  periodically. 

This  profit  and  loss  statement  for  a  railroad  is  re- 
ferred to  as  a  representative  statement  for  a  service  busi- 
ness, and  may  be  adopted  for  any  other  service  business, 
such  as  livery  stable,  garage,  hotel,  repair  shop,  gas  or 
electric  light  and  power  companies,  educational  institu- 
tions, etc.,  the  titles  for  sources  of  income  and  for  oper- 
ating expenses  being  varied  to  suit  the  business. 

50  E.  Form  No.  12  N  and  8.  The  statements  of 
profit  and  loss  for  trading  business  here  given  are  typical 
for  wholesale  and  retail  trading  business  generally,  and 
may  be  in  more  or  less  elaborate  form.  The  statement 
may  be  written  on  a  single  page  (like  Form  12  N)  or  on 
two  opposite  pages  like  Form  8,  depending  on  the  amount 
of  analysis  thought  desirable. 

In  Form  8,  the  first  section,  8  A,  shows  the  sales  for 
the  period,  diminished  by  the  cost  of  the  merchandise 
sold,  leaving  as  a  remainder  the  gross  trading  profit. 
This  section  is  of  the  utmost  value,  as  from  it  may  be 
taken  the  volume  of  business,  and  the  percent  of  gross 
profit. 

The  second  section,  8  B,  shows  the  gross  trading 
profit,  diminished  by  selling  expenses,  leaving  net  trading 
profit. 

The  third  section,  8  C,  shows  net  trading  profit  di- 
minished by  office  or  administrative  expenses,  producing 
the  business  profit. 

The  fourth  section,  8  D,  shows  the  business  profit 
diminished  by  capital  expenses,  or  the  expenses  of  bor- 


58  P.  &  L.  STATEMENT   (41-50)— Model  Forms 

rowing,  and  maintaining^  the  value  of  capital  accounts. 
The  remainder  is  the  net  profit  for  distribution. 

The  fifth  section,  8  E,  shows  net  profit  for  distribu- 
tion and  how  it  was  distributed. 

50  F.  Form  No.  9.  In  the  household  profit  and  loss 
statement,  there  appears  first  a  list  of  the  revenues  and 
incomes  received  from  various  sources.  The  item,  "5th 
Ave.  Property,"  shows  the  rents  received,  diminished  by 
the  expenses  for  maintainance  of  the  property.  The  total 
income  is  carried  to  the  second  section. 

Prom  the  total  income  are  taken  the  current  ex- 
penses divided  into  such  primary  accounts  as  desired, 
leaving  net  profit  or  deficit  for  the  year. 

50  G.  Form  No.  7  D.  %The  bank  statement  of  profits 
and  losses  is  the  simplest  of  all.  As  shown  from  the  first 
section  of  the  statement,  the  profits  are  derived  from,  (1) 
interest  on  the  money  loaned  to  customers;  (2)  exchange 
on  drafts  sold  to  customers  who  buy  drafts  for  remit- 
tance; (3)  interest  on  bonds  or  other  securities  owned 
by  the  bank;  (4)  charges  for  collecting  paper  for  cus- 
tomers. The  losses  are,  (1)  salaries  paid  to  the  working 
force  of  the  bank;  (2)  interest  paid  to  certain  depositors 
who  leave  money  at  interest;  (3) general  expenses,  in- 
cluding cost  of  books  and  stationery,  heat,  light,  rent,  in- 
surance, etc. 

The  second  section  shows  the  distribution  of  profits 
into  two  reserve  accounts,  and  the  remainder  paid  as 
dividend  to  the  owners. 

Recapitulation  41-50.  The  profit  and  loss  statement 
of  a  business  is  derived  from  the  accounts  that  show  the 
incomes  and  expenditures  of  .the  business  operations, 
covering  a  definite  period  of  time,  called  the  fiscal  period. 
TIu'iv  ;m  three  general  kinds  of  business;  viz:  trading, 
service,  financial.  In  a  typical  profit  and  loss  state- 
ment for  any  of  these,  the  leading  section  exhibits  the 
income  derived  from  the  ordinary  business  operations, 
diminished  by  the  direct  cost  of  producing  any  utilities 
sold.  This  section  thus  exhibits  gross  business  profit. 


BUSINESS  LEDGER   (51-60)— Nominal  Acc'ts  59 

This  gross  business  profit  is  diminished  by  selling,  ad- 
ministrative, and  capital  expenses,  and  increased  by  capi- 
tal earnings,  if  any.  The  result  is  an  exhibit  of  the  net 
profit  for  distribution. 

The  detail  to  which  the  various  items  of  income  and 
expenditure  given  in  the  statement  may  be  carried,  de- 
pends on  the  amount  of  information  sought,  but,  in  the 
typical  statement,  shows  the  following  distinct  items  of 
information : 

(1).  The  gross  volume  of  business  and  the  gross 
profit  in  the  form  to  derive  the  percentage  of  profit. 

(2).     The  cost  of  securing  sales. 

(3).     The  cost  of  supervision. 

(4).  The  cost  for  capital,  and  the  profit  from  sur- 
plus capital. 

(5).     The  net  profit  for  distribution. 

51.  Nominal  Accounts.  The  Profit  and  Loss  ac- 
count is  the  permanent  ledger  record  of  the  profits  (on 
credit  side),  and  the  losses  (on  debit  side),  accumulated 
during  a  given  fiscal  period. 

The  profits  consist  of  revenues,  incomes,  and  un- 
classified profits.  The  revenues  and  incomes  are  carried 
to  the  credit  of  the  Profit  and  Loss  account,  at  the  close 
of  a  fiscal  period,  from  the  primary  accounts  described 
in  Prin.  52  to  55.  Unclassified  profits  are  credited  di- 
rectly to  the  Profit  and  Loss  account  from  the  original 
entries. 

The  losses  consist  of  expenses  and  unclassified  losses. 
The  expenses  are  carried  to  the  Profit  and  Loss  account, 
at  the  close  of  the  fiscal  period,  from  the  primary  ex- 
pense accounts  described  in  Prin.  56  to  59.  The  unclassi- 
fied business  losses  are  charged  to  the  Profit  and  Loss 
account  directly  from  the  original  entries,  with  the  ex- 
ception of  losses  that  have  been  anticipated  by  a  reserve, 
such  losses  being  charged  to  a  reserve  account. 

After  all  the  above  charges  and  credits  have  been 
carried  to  the  Profit  and  Loss  account  at  the  close  of  the 


60       BUSINESS  LEDGER   (41-50)— Distribution  of  Profits 

fiscal  period,  the  credit  excess  is  a  net  profit,  or  the  debit 
excess  is  a  net  loss,  for  the  period. 

The  net  profit  or  loss  is  carried  out  of  the  business 
ledger  into  the  financial  ledger,  or  from  the  business  di- 
vision to  the  financial  division  of  a  complete  ledger,  to  the 
credit  (if  a  profit),  or  to  the  debit  (if  a  loss),  of  such 
accounts  as  the  owners  of  the  business  determine. 

51  B.  When  the  business  is  owned  by  a  sole  proprie- 
tor, the  net  profit  is  very  generally  credited,  or  the  net 
loss  charged,  to  the  Capital  account.  (See  Form  10  0 
closed  into  10  L  by  direct  closing ;  or  Form  12  V  closed 
into  12  P  by  the  last  journal  entry  on  12  O.) 

If  it  is  not  desirable  to  increase  the  capital,  the  net 
profit  may  be  closed  either  into  the  proprietor's  drawing 
account,  or  into  a  reserve  account. 

51  C.  When  the  business  is  owned  by  partners,  the 
net  profit  or  loss  may  be  divided  according  to  agreement, 
and  closed  out  of  the  Profit  and  Loss  account  into  the 
several  partners'  Capital  accounts,  or  into  Drawing  or 
Reserve  accounts  as  above. 

51  D.  When  the  business  is  owned  by  stockholders, 
the  net  profit  may  be  closed  into  one  or  into  several  ac- 
counts, of  the  financial  ledger.  It  may  be  closed  into 
Dividend  account,  into  Surplus  account,  into  Undivided 
Profits  account,  or  into  Capital  Stock  account  by  an  issue 
of  *stock  dividends,  or  into  a  reserve,  or  any  or  all  of 
these. 

The  net  loss  may  be  closed  into  Undivided  Profits, 
Surplus  or  other  general  reserve  account,  if  such  account 
shows  reserve  sufficient  to  offset  the  loss  in  question;  or 
it  may  be  closed  into  Assessment  account,  in  which  the 
stockholders  are  individually  charged  pro  rata,  for  their 
assessments  to  meet  the  loss. 

It  is  not  good  practice  to  leave  the  Profit  and  Loss  ac- 
count open  from  one  fiscal  period  to  another,  \yhich  is 
sometimes  done  when  the  management  fails  to  make  a 
financial  disposition  of  the  net  losses. 


BUSINESS  LEDGER   (51-60)— Revenue  Acc'ts  lil 

52.  Revenue  Accounts  are  credited  for  the  earnings 
arising  from  the  sale  .of  commodities  or  services,  and 
show,  at  the  close  of  a  given  fiscal  period,  the  amounts  of 
gross  profits  from  the  ordinary  business  operations. 

While  revenue  is  the  general  term  for  business  earn- 
ings, a  more  specific  title  is  ordinarly  used  to  show  the 
particular  kind  of  business  service  sold.  It  is  impracti- 
cable to  enumerate  all  titles  of  revenue  accounts;  a  few 
follow : 

Wages,  earnings  of  a  person,  usually  for  manual 
labor. 

Salary,  earnings  of  a  person  for  personal  service  en- 
gaged for  a  period  of  time. 

Attorney's  Fees,  earnings  of  a  lawyer  for  legal 
counsel. 

Livery  Hire,  earnings  of  a  liveryman  for  use  of 
vehicles. 

Light,  earnings  of  a  light  company  for  furnishing 
light. 

Lodging,  earnings  of  a  hotel  for  the  use  of  rooms. 

Passenger  Earnings,  earnings  of  a  railroad  for  carry- 
ing passengers. 

Cartage,  earnings  received  by  a  dray  line  for  moving 
goods. 

Collection,  earnings  received  by  a  bank  or  person 
for  collecting  paper. 

Commission,  earnings  of  a  commission  merchant  for 
selling  another's  goods. 

Trading,  earnings  of  a  merchant  or  dealer  for 
collecting  and  distributing  goods.  The  trading  account 
contains  several  factors  requiring  somewhat  lengthy 
comment.  (See  Prin.  53.) 

After  the  titles  of  the  revenue  accounts  are  de- 
termined, such  accounts  receive  credit  from  the  books  of 
first  entry,  for  the  given  revenues,  as  earned,  and  are 
charged  for  any  deductions  from  such  earnings.  At  the 
close  of  the  fiscal  period,  the  revenue  accounts  are  closed 
and  the  balances  carried  to  the  credit  of  Profit  and  Loss. 


62  BUSINESS  LEDGER   (51-60)— Trading  Acc't 

(See  Form  12  M  closed  directly  into  Form  10  0 ;  or  12  S 
closed  by  journal  entry  into  12V.) 

53.  The  Trading  Account  (see  Form  12  S,  or  14  J) 
is  set  up  to  show  the  revenue  arising  directly  from  mer- 
chandise sold  during  a  given  fiscal  period.  It  is  charged 
for  the  amount  of  merchandise  inventory  carried  over 
as  stock  from  the  previous  fiscal  period,  also  for  the  net 
merchandise  bought  or  of  merchandise  manufactured, 
during  the  fiscal  period  which  it  closes.  These  charges 
include  the  invoice  cost  of  merchandise,  the  in-freight, 
and  any  other -expenses  necessary  to  lay  the  goods  down 
in  the  store  ready  for  sale. 

It  is  credited  for  the  inventory  of  merchandise 
carried  over  as  stock  into  the  following  fiscal  period, 
also,  for  the  net  amount  of  merchandise  sold  during  the 
fiscal  period  closing. 

After  these  items  are  posted,  the  difference  between 
the  debit  and  credit  sides  is  a  profit,  if  the  credit  side  is 
greater,  and  a  loss,  if  the  debit  side  is  greater.  This  bal- 
ance is  carried  to  Profit  and  Loss. 

• 

Note. — The  trading  account,  under  the  name  of  Mer- 
chandise account,  has  by  many  bookkeepers  been  charged 
and  credited  directly  from  the  books  of  first  entry,  but 
the  more  detailed  attention  given  to  that  most  extensive 
of  all  the  business  processes — the  purchase  and  sale  of 
the  stock  in  trade — has  convinced  most  accountants  that, 
as  a  rule,  the  Trading  account  should  receive  its  debit 
and  credit  entries  from  certain  primary  accounts  of 
which  the  Merchandise  Inventory,  Merchandise  Sold, 
Merchandise  Bought,  and  Merchandise  Manufactured  ac- 
counts are  the  most  important  examples.  The  principal 
primary  accounts  are  discussed  in  Prin.  52  B  to  52  F. 

53  B.  The  Merchandise  Sold  account  (see  Forms 
12  E,  12  A  or  14  G),  frequently  called  Sales  account,  is 
credited  for  the  amounts  of  merchandise  sold  from  the 
sales  records,  and  charged  for  any  rebates,  allowances, 
or  incidental  deductions,  which  diminish  the  amount  of 


BUSINESS  LEDGER   (51-60)— Mdse.  Bought  and  Sold      63 

the  collections  realized,  or  to  be  realized,  from  the  mer- 
chandise sold. 

At  the  close  of  a  fiscal  period,  the  account  is  closed 
and  the  balance  is  carried  to  the  credit  of  the  Trading 
account. 

53  C.  The  Merchandise  Bought  account  (see  Form 
12  F,  12  R  or  14  H),  also  called  Purchase  account  or 
Purchases  account,  is  charged  for  the  cost  of  all  merchan- 
dise bought  for  sale.  This  cost  includes  invoice  price, 
in-freight,  transfer,  and  storage  or  warehouse  charges, 
if  any,  all  told,  being  the  cost  of  laying  the  merchandise 
down  in  the  store.  It  is  credited  for  any  rebates,  allow- 
ances, or  other  incidental  deductions  which  diminish  the 
amounts  paid,  or  to  be  paid,  for  the  merchandise  bought. 

At  the  close  of  the  fiscal  period,  the  account  is  closed 
and  the  balance  carried  to  the  debit  of  the  trading  ac- 
count. 

Note. — The  Merchandise  Bought  account  is  some- 
times divided  by  opening  a  separate  account  of  Freight 
on  Merchandise  Bought.  (Prin.  53  D.) 

53  D.  The  Freight  on  Merchandise  Bought  account 
(see  Form  14  I)  is  debited  for  the  freight  and  transfer 
charges  on  the  merchandise  bought,  and  credited  for  any 
freight  deductions,  allowances  or  rebates.  The  balance, 
at  the  close  of  the  period,  is  carried  to  the  Trading  ac- 
count. (See  Form  141.) 

53  E.  The  Freight  on  Merchandise  Sold  account  is 
to  be  handled  in  one  of  two  ways:  (1)  If  it  represents 
freight  prepaid  and  charged  to  the  customer  in  his  bill — 
a  custom  in  many  houses — the  account  is  handled  pre- 
cisely as  with  Freight  on  Merchandise  Bought,  that  is, 
closed  into  Trading  account.  (2)  If  it  is  prepaid  but  not 
charged  to  the  customer,  that  is,  if  the  prepayment  is  a 
selling  inducement  to  the  purchaser,  the  account  is 
treated  as  a  selling  expense.  (See  Prin.  56.) 

-  53  F.  The  amount  of  merchandise  standing  in  the 
Inventory  account  at  the  beginning  of  a  fiscal  period,  is 
charged,  at  its  close,  to  the  Trading  account,  along  with 


64         BUSINESS  LEDGER  (51-60)— Mdse.  Manufactured 

the  merchandise  bought  during  the  period.  The  reason 
for  this  is  that  merchandise  on  hand  is  received  into  the 
trading  operations  from  the  owner  out  of  his  capital. 
The  merchandise  bought  is  received  into  the  trading  op- 
erations from  outside  sources. 

The  inventory  of  merchandise  at  closing  is  credited, 
along  with  the  total  of  merchandise  sold,  to  the  Trading 
account,  the  merchandise  inventoried  being  returned 
from  the  trading  operations,  the  owner's  assets,  while 
the  value  of  merchandise  sold  has  already  been  returned 
to  the  assets  in  cash  or  book  accounts.  (See  Form  14  J.) 

Remark. — In  the  Trading  statement,  the  inventory  at 
closing  is  deducted  from  the  other  debits  of  the  Trading 
account  to  show  cost  of  merchandise  sold  in  one  amount. 
In  the  ledger,  Trading  account,  which  is  a  ledger  record 
of  the  trading  statement,  it  is  usual  to  post  deductions 
from  one  side  of  an  account  as  additions  to  the  opposite 
side,  thus  securing  the  same  aggregate  result  without  re- 
sorting to  both  addition  and  subtraction  in  the  same 
column  of  the  ledger. 

Thus  the  amount  of  the  current  inventory,  which, 
must,  in  the  statement,  be  subtracted  from  the  amount  of 
merchandise  bought,  on  the  debit  side,  to  show  the  cost 
of  merchandise  sold,  in  the  ledger  account  is  added  to  the 
amount  of  merchandise  sold,  on  the  credit  side.  The 
resultant  difference  or  profit  is  the  same  in  either  case. 

53  G.  The  Merchandise  Manufactured  account,  or 
Production  Cost  account,  is  the  account  showing  the  costs 
entering  into  the  finished  product  which  is  offered  for 
sale. 

This  account  is,  as  a  rule,  made  up  from  several 
primary  accounts  which  are  closed  into  it  before  Mer- 
chandise Manufactured  is  closed  into  the  Trading  ac- 
count. The  four  principal  primary  manufacturing  ac- 
counts are: 

(1).  Materials,  charged,  like  Merchandise  Bought 
account,  for  the  cost  of  material  entering  into  manufac- 
turing. 


BUSINESS  LEDGER   (51-60)— Income— Expense  65 

(2).     Labor,  charged  for  the  wages  of  operatives. 

(3).  Factory  Expenses,  charged  for  the  miscellane- 
ous expenses  in  the  factory. 

(4).  Overhead,  charged  for  the  prportion  of  the 
general  office  expenses  that  are  absorbed  in  production. 

The  manner  of  gathering  these  costs  and  assigning 
them  to  production  units  are  discussed  in  a  separate 
division  entitled  Cost  Accounting. 

At  the  close  of  the  fiscal  period,  the  Merchandise 
Manufactured  account  is  closed  and  the  balance  carried 
to  the  debit  of  Trading  account. 

54.  Income  Accounts  are  to  show  the  yield  to  the 
business  from  money  or  other  capital  in  the  hands  of 
others.     Such  accounts  are  credited  for  the  cash  or  col- 
lections yielded  to  the  business  during  the  fiscal  period, 
and  are  charged  for  any  deductions  from  such  yield.     At 
the  close  of  the  fiscal  period  they  are  closed  into  Profit 
and  Loss.     Several  titles  of  income  are: 

Interest,  (see  Form  12  U)  the  earnings  from  loaning 
money. 

Premiums,  the  earnings  from  financial  assurance 
against  fire  or  loss  of  life,  etc. 

Exchange,  the  earnings  from  transfer  of  money  by 
means  of  credit. 

Cash  Discount,  the  earnings  arising  from  the  use  of 
ready  cash  in  paying  future  maturities. 

Rents,  the  earnings  from  the  use  of  property. 

55.  The  Complete  Expense  account  is  charged  for 
money,  or  its  equivalent,    spent    to    procure    things  con- 
sumed in  maintaining  the  business  organization.     Thus, 
the  cost  of  rent,  light,  heat,  stationery,  and  office  books, 
salaries,   interest,    depreciation,   etc.,    and  the    like    are 
charged  to  Expense.     In  a  simple  business,  the   single 
Expense  account  may  include  them  all,  but  a  more  exten- 
sive business  demands  that  expenses  be  subdivided  into 
various  primary   expense   accounts,   of  which  the  three 
kinds  named  in  Prin.  56,  57  and  58  are  observed  by  care- 
ful business  men  and  accountants. 


66        BUSINESS  LEDGER  (51-60)— Expense— Speculation 

The  complete  expense  account  is  closed  into  Profit 
and  Loss  at  the  close  of  the  fiscal  period.  (See  Form 
10  N  closed  direct  into  10  O,  or  by  journal  entry  12  T 
into  12V.) 

55  B.  Department  Expense.  When  business  is  de- 
partmentized,  the  expenses  should  be  charged  to  the  con- 
suming department,  instead  of  to  the  organization  as  a 
whole.  Thus,  in  a  department  store,  which  may  have  ?.ll 
the  way  from  two  to  two  hundred  Departments,  selling 
as  many  kinds  of  merchandise,  each  department  is  under 
a  manager,  or  buyer,  who  is  responsible  for  the  success 
of  his  department.  Each  department  is  charged  for  all 
expenses  incurred  for  its  maintenance,  including  its  share 
of  floor  space,  light,  heat,  salaries,  advertising,  deprecia- 
tion, interest  on  capital  used,  stationery,  etc. 

A  branch  store  is  similarly  conducted  by  a  manager, 
and  the  expenses  pertaining  to  the  store  are  included  in 
a  separate  expense  account. 

55  C.  Speculations  and  Ventures  give  rise  to  ac- 
counts of  various  kinds  of  property,  bought  with  a  view  to 
selling  when  the  market  price  advances.  Such  accounts 
represent  the  cost  of  distinct  things,  as  a  piece  of  land, 
a  car  of  wheat,  a  block  of  stock.  These  would  be  charged 
severally  for  all  costs.  The  account  is  closed  when  sale 
is  made.  The  expenses  pertaining  to  a  speculative  ac- 
count are  charged  directly  to  the  account  of  the  specula- 
tion, which  is  kept  in  the  financial  ledger,  and  considered 
a  part  of  the  cost. 

Thus  a  piece  of  land  bought  for  speculation  would  be 
directly  chargeable  for  the  expenses,  and  credited  for  the 
incomes  from  the  speculation,  rather  than  in  an  Income 
and  Expense  account  as  would  be  the  case  if  the  property 
in  question  were  purchased  for  business  use. 

56.  Selling  Expense  includes  the  outlays  made  in 
effecting  sales  of  the  merchandise  from  tin-  lime  tin-  mer- 
chandise is  laid  down  in  the  store,  until  it  is  disposed  of. 
It  is  often  best  to  charge  all  selling  expenses  to  one  ac- 
count, and,  under  conditions,  a  number  of  primary  ac- 


BUSINESS  LEDGER   (51-60)— Expense  67 

counts  will  serve  the  purpose  better.  Among  these 
primary  accounts  are,  (1)  Store  Room  Help;  (2)  Sales- 
men's Salaries  and  Road  Expenses;  (3)  Advertising,  in- 
cluding postage  and  expressage  applied  to  advertising; 
(4)  Supplies,  including  cartons,  wrapping  material  and 
incidentals;  (5)  Delivery  Expense  (not  charged  to  cus- 
tomers) ;  and  (6)  Depreciation  (on  property  used  by  the 
selling  department). 

Such  primary  accounts  are  to  be  opened  separately, 
as  they  are  needed,  to  give  detailed  information  about 
this  class  of  expenditures,  and  are  to  be  discontinued 
when  they  are  not  needed. 

At  the  close  of  the  fiscal  period,  the  primary  accounts 
are  closed  into  Profit  and  Loss,  or  they  may  be  closed  into 
the  general  Selling  Expense  account  which,  in  turn,  is 
closed  into  Profit  and  Loss. 

Remark. — The  inventories  may  include  property  on 
hand  or  obligations  pertaining  to  any  of  the  above  ac- 
counts. If  assets,  the  inventories  are  entered  to  the 
credit  of  the  Selling  Expense  account  as  in  the  Trading 
account.  If  a  liability,  the  inventory  is  entered  to  the 
debit,  as  in  the  Interest  account.  (See  Form  14  K.) 

57.  Office  Expense,  variously  called  Administrative 
Expense,  or  Overhead  Expense,  or  General  Expense,  in- 
cludes the  expenses  of  the  general  oversight  and  manage- 
ment of  the  business,  and  may  be  charged  to  either  of 
the  foregoing  titles,  or  may  be  charged  to  various  primary 
accounts;  these  are:     (1)  Salaries  of  the  office  force;  (2) 
Office    Supplies,   including  blank  books,    stationery   and 
postage,  not  directly  applied  to  advertising;   (3)   Light, 
Heat,  Rent,  Taxes  and  Insurance;    (4)   Depreciation,  in 
property  for  office  use. 

Such  primary  accounts  may  be  closed  directly  into 
Profit  and  Loss  at  the  close  of  the  fiscal  period,  or  they 
may  be  closed  into  Office  Expense,  which  in  turn  is  closed 
into  Profit  and  Loss. 

58.  Capital   Expenses  include  the   expenditures  or 
losses   incurred   in   securing   or   retaining   capital.     This 


68  BUSINESS  LEDGER  (51-60)— Depreciation 

account  may  be  divided  into  several  primary  accounts; 
among  them  are:  (1)  Interest  and  Discount  Paid,  charged 
for  payments  for  the  use  of  money  borrowed  from  others ; 
(2)  Expense  of  a  specified  property  as  of  a  house  and 
lot  owned  by,  but  not  used  in  the  business.  Such  ex- 
penses are  usually  charged  to  income  from  the  given 
property.  (See  Prin.  59.)  (3)  Depreciation  in  property 
which  is  not  assigned  to  any  business  use. 

Such  primary  accounts  may  be  closed  into  Profit  and 
Loss  direct,  or  through  Capital  Expense  and  Incomes  at 
the  close  of  the  fiscal  period. 

58  B.  Depreciation  is  the  expense  sustained  by  the 
business,  or  any  part  of  it  separately  considered,  through 
the  ordinarary  wearing  out  of  the  fixed  property  assets. 
The  amount  of  this  diminishment  in  value  is  estimated 
when  the  books  are  closed,  and  is  charged  to  that  nominal 
account  which  explains  the  use  of  the  property  in  the 
business  economy.  Thus  depreciation  in  delivery  equip- 
ment is  charged  to  Delivery  Expense;  in  machinery,  to 
Manufacturing  Expense,  etc.,  and  a  corresponding  credit 
is  made  on  the  account  of  Reserve  for  Depreciation,  in 
the  financial  ledger. 

To  estimate  the  actual  depreciation  in  the  value  of 
machinery,  furniture,  fixtures,  or  other  property,  requires 
that  one  should  be  familiar  with  the  proprety  in  question, 
and  know  how  long  it  should  be  useful  under  the  wear 
to  which  it  is  subjected.  Much  equipment  and  machinery 
is  assumed  to.be  useful  for  ten  years ;  this  would  place  1  he 
depreciation  at  one-tenth,  or  ten  per  cent,  each  y«-,ir. 
provided  the  entire  value  is  extinguished  at  the  end  of 
the  ten  years.  A  certain  per  cent  of  depreciation  an- 
nually computed  on  the  remainder  after  previous  deduc- 
tions, is  often  recommended  by  accountants,  especially 
in  the  case  of  property  which  may  be  sold,  after  it  has 
ceased  to  be  useful  to  the  business.  It  is  easily  seen  tluit 
some  property,  under  certain  conditions,  would  not  last 
for  ten  years.  In  this  case,  the  annual  depreciation  would 
be  greater  than  ten  per  cent.  Other  property  might  be 


BUSINESS  LEDGER   (51-60)— DiininislumMii  05) 

useful  much  longer,  making  the  annual  depreciation  less 
than  ten  per  cent.  Hence,  the  amount  to  charge  off  for 
depreciation  must  be  governed  by  circumstances. 

The  effect  of  charging  the  expense  account  for  the 
decrease  in  value  during  a  fiscal  period,  is  to  reduce  the 
profit  for  distribution  by  the  amount  charged — in 
other  words,  to  leave  enough  cash  in  the  business  to 
offset  the  diminishing  value  of  the  depreciating  property. 

This  amount,  while  charged  like  any  other  expense, 
does  not  represent  any  cash  paid  out,  but  is  accounted 
for  by  the  credit  to  the  account  of  Reeserve  for  Depre- 
ciation, as  previously  explained. 

58  C.  Good  Will,  Patent  Rights,  Franchises,  Patterns 
and  Drawings,  Premiums  on  Bonds,  and  any  accounts  of 
assets  of  an  intangible  or  a  strictly  temporary  nature, 
(which  will  be  valueless  after  a  lapse  of  time,  whether 
used  or  not)  but  whose  life  may  extend  over  years, 
should  be  reduced  each  year  by  writing  off  the  portion  of 
diminishment  sustained,  during  the  year.  This  is  done 
by  charging  the  proper  expense  account,  and  crediting 
an  equal  amount  to  the  asset  account  (not  by  crediting 
a  Reserve  for  Depreciation  account).  The  reason  for 
doing  so,  is  that  the  accounts  represent  assets,  which 
cannot  be  replaced  by  .purchase,  that,  practically  speak- 
ing, they  have  no  independent  market  value,  also,  that 
they  are  to  be  absorbed  in  profits  as  rapidly  as  possible. 

Small  and  frequently  replaced  articles  of  equipment, 
such  as  tools,  may  be  treated  in  the  same  way.  Their 
presence  must  be  accounted  for  by  their  being  checked 
up  with  an  itemized  record  of  them  in  the  tools  ledger, 
(an  auxiliary  book)  as  any  other  fixed  assets  are  com- 
pared with  the  ledger  accounts;  yet,  their  diminish- 
ing value  must  be  determined  by  estimate,  since 
they  must  be  replaced,  when  missing,  or  supplied  in 
greater  or  less  quantity  as  needed.  Thus,  the  annual 
diminishment  in  the  value  of  tools,  while  chargeable  to 
the  proper  expense  account,  should  be  credited  to  the 


70       BUSINESS  LEDGER   (51-60) — Income  &  Exp.  Interest 

Tools  account  direct,  to  which  account  the  tools  ledger 
bears  the  relation  of  an  inventory. 

Note. — Losses  and  gains  arising  from  no  ordinary 
operation  of  the  business,  but  in  the  way  of  accident,  are 
not  to  be  connected  with  depreciation.  They  should  be 
entered  directly  into  Profit  and  Loss  or,  when  desired, 
in  a  reserve  account  to  be  closed  later  into  Profit 
and  Loss.  Among  such  causes  may  be  mentioned  theft 
of  money,  or,  receipt  of  money  by  gift,  also  destruction 
of  property  by  fires,  accidents,  etc. 

59.  Income  and  Expense  accounts  contain,  as  credits, 
the  incomes  earned  from  a  certain  investment  of  capital, 
and  as  debits,  the  expenses  pertaining  to  the  particular 
investment  that  yields  the  income.     Thus,  the  investment 
in  a  piece  of  property,  which  we  may  call  ' '  Irving  Flats, ' ' 
may  yield  a  rent  income,  but  will  require  expenditures 
for  repairs,  and  taxes,  and  perhaps  for  advertising  and 
commissions  to  an  agent.     (See  Form  11  E.)     The  income 
would  be  credited,  and  the  expenses  charged,  to  an  ac- 
count of  Income  and  Expense,  Irving  Flats.     The  bal- 
ance of  this  account,   called  the  net  income,  would  be 
closed  into  Profit  and  Loss,  at  the  end  of  the  fiscal  period. 

59  B.  Interest  received  is  an  income ;  interest  paid 
is  an  expense.  The  former  may  be  credited  and  the 
latter  charged  to  a  single  Interest  account,  (which,  wln-n 
so  treated,  is  really  an  income  and  expense  account)  and 
the  balance  of  this  account  closed  into  Profit  and  Loss 
at  the  end  of  the  fiscal  period.  (See  Form  12  U.) 

It  is  often  better  to  divide  the  general  interest  ac- 
count into  primary  accounts  entitled,  Interest  Paid  and 
Interest  Received. 

60.  Before  closing  nominal  accounts  into  Profit  and 
Loss,  the  Inventories  account  must  be  considered. 

(1).  All  resource  or  liability  inventories,  standing 
in  the  financial  ledger  since  the  close  of  the  previous 
fiscal  period,  should,  when  the  ledger  is  again  closed,  be 
closed  into  the  nominal  accounts  to  which  they  belong. 

(2).     All    inventories    taken    at    the    closing    time, 


BUSINESS  LEDGER   (51-60)— Inventories  71 

should  be  entered  in  the  nominal  accounts,  resource  in- 
ventories on  the  credit  side,  and  liability  inventories  on 
the  debit  side. 

The  most  common  inventories  are: 

(1).  In  Trading  account,  stock  of  merchandise  on 
hand  at  closing. 

(2).  In  other  revenue  accounts,  services  rendered 
but  not  yet  charged. 

(3).  In  Income  accounts,  interest  or  rents  accrued 
but  not  collected. 

(4).  In  expense  accounts,  material  or  labor  charged 
to  the  account  but  not  yet  consumed. 

The  most  common  liability  inventories  are : 

(1).  In  Expense  account,  wages  accrued  or  mater- 
ial consumed  but  not  yet  paid  for. 

(2).  In  Interest  account,  interest  payable  accrued 
but  not  yet  paid. 

After  the  entry  of  the  inventories,  the  difference 
shown  by  a  nominal  account  is  a  profit  or  a  loss  pertaining 
to  the  fiscal  period  under  consideration. 

Recapitulation  51  to  60.  The  Profit  and  Loss  ac- 
count shows,  as  credits,  all  profits,  and,  as  debits,  all 
losses  of  a  given  fiscal  period.  The  balance,  which  is 
net  profit  or  loss,  is  closed  into  the  financial  ledger. 

The  profits  are  principally  derived  from  revenues  and 
incomes  which  are  posted  from  the  books  of  original  entry 
to  primary  revenue  and  income  accounts,  these  accounts 
closing  either  directly,  or  through  some  intermediate  ac- 
counts, into  Profit  and  Loss  at  the  end  of  the  fiscal 
period.  Added  to  these,  may  be  unclassified  profits,  which 
are  posted  to  the  credit  of  Profit  and  Loss  from  the  origi- 
nal entries. 

The  losses  consist  of  expenses  or  unclassified  losses. 
Expenses  are  first  posted  to  certain  primary  expense 
accounts,  which  are  closed  into  Profit  and  Loss  at  the  end 
of  the  fiscal  period.  Unclassified  losses  are  posted  di- 
rectly from  the  original  entries  to  the  Profit  and  Loss 
account. 


72  AUDITING   ( 61-70 ) —Purposes 

Before  closing  current  nominal  accounts  into  Profit  and 
Loss,  such  accounts  require  credits  for  resource  inven- 
tories, and  charges  for  liability  inventories,  taken  at  the 
time  of  closing. 

After  the  ledger  is  closed,  all  nominal  accounts  ap- 
pear in  a  closed  condition,  and  their  net  result  appears  in 
the  financial  ledger. 

61.  Auditing  (see  Prin.  3)  involves  a  review  of 
books  and  records,  with  attention  to  their  supporting 
vouchers^  or  other  evidences  of  their  correctness,  ac- 
curacy or  adequacy  for  the  purpose  intended. 

The  special  purposes  of  an  audit  may  be  either  one 
or  more  of  the  following: 

(1).  To  prove  the  mechanical  and  mathematical  ac- 
curacy of  a  set  of  books.  (Prin.  63.) 

(2).  To  show  that  the  entries  and  accounts  are  true 
records  of  actual  transactions  and  existing  values. 
(Prin.  64.) 

(3).  To  show  fraud,  or  absence  of  fraud,  on  the  part 
of  officers  or  other  employes  of  the  business.  (Prin.  65.) 

(4).  To  show  that  books  and  records  kept  are  suit- 
able, economical  and  complete.  (Prin.  66.) 

(5).  To  show,  or  to  verify,  an  exhibit  of  the  worth 
of  the  business  and  its  earning  power,  for  the  benefit  of 
the  owners  or  of  prospective  investors.  (Prin.  67.) 

61  B.  A  general  auditor  should  be  a  bookkeeper,  ac- 
countant and  business  man,  well  informed  in  commercial 
law  and  business  mathematics,  and  withal,  have  a  faculty 
of  applying  sound  business  principles  to  existing  con- 
ditions. 

A  special  auditor  should  be  familiar  with  the  business, 
books  and  conditions  of  the  particular  set  of  books  which 
he  is  to  audit. 

In  making  an  audit,  there  is  a  certain  order  of  pro- 
cedure to  be  followed,  as  in  all  other  matters  pertaining 
to  business  records.  To  follow  this  order  may  be  all  that 
is  necessary,  or  the  order  of  procedure  may  be  only  be- 
ginning for  additional  investigations,  which  may  be  found 


AUDITING   (61-70)— Conditions— Records  73 

necessary,  because  of  the  insufficiency  of  the  records  at 
hand. 

A  bookkeeper  may  keep  a  set  of  books  in  such  a  way 
that  an  audit  is  merely  a  formality,  or  they  may  be  kept 
in  such  a  way  that  an  auditor  will  be  obliged  to  do  the 
bookkeeper's  work  from  the  start.  Good  bookkeeping 
is  the  forerunner  of  inexpensive  auditing. 

62.  General  Conditions.  Before  undertaking  an 
audit,  the  auditor  should  determine  whether  his  examina- 
tion is  to  cover  the  entire  period  from  the  beginning  of 
a  business,  or  from  any  given  date  in  its  progress.  If 
an  audit  between  given  dates  is  undertaken,  the  prior 
records  are  the  subject  of  inquiry  only  as  they  affect  the 
given  period. 

62  B.  The  auditor  should  first  determine  the  pur- 
pose of  the  audit,  which  may  be  one  or  more  of  the  five 
purposes  specified  in  Prin.  61.  His  preparation  should 
accord  with  the  purpose. 

62  C.  The  auditor  should  study  the  conditions  of  the 
business  and  estimate  the  probable  volume  and  kind  of 
its  business  operations,  consider  the  ordinary  terms  of 
purchase  and  sale,  investigate  manufacturing  processes, 
if  any,  and  the  ordinary  conditions  under  which  the  busi- 
ness is  operated.  He  should  then  make  an  outline  of  the 
accounts  and  books  that  should  be  kept  for  that  business. 
Having  in  mind  what  the  books  should  be,  and  what  they 
should  show,  he  should  make  a  complete  list  of  the  books 
that  are  actually  kept,  separating  the  posting  books  from 
the  auxiliary  books. 

62  D.  Auditor's  Records.  An  auditor  should  pre- 
pare a  record,  setting  forth  his  agreement  as  to  the  gen- 
eral conditions  of  the  audit,  and  covering  the  important 
matters  connected  therewith. 

An  auditor's  record  may  contain  abstracts  from  the 
books,  totals,  proofs,  and  computations  to  verify  the 
books;  or  it  may  extend  to  an  entire  re-writing  of  the 
books ,  in  skeleton  form,  from  the  original  data.  It 


74  AUDITING   (61-70)— Mechanical  Accuracy 

should  be  so  arranged  as  to  exhibit  any  vital  points  that 
may  not  be  shown  in  the  bookkeeper's  records. 

62  E.     The  amount  and  kind  of  work  demanded  of  an 
auditor  depends  on  the  amount  and  kind  of  work  pre- 
viously done  by  the  bookkeeper.    His  researches  may  in- 
clude the  following:     (1)    A  rearrangement  of  vouchers 
and  substitution  of  missing  vouchers;   (2)   a  comparison 
of  the  cash  account  with  the  bank  account;  (3)   a  com- 
parison of  the  accounts  of  customers  and  creditors  with 
the  book  records  of  the  persons  with  whom  the  accounts 
are  kept;  (4)  a  comparison   of  the   account   of   invoices 
with  the  goods  actually  received;  (5)  the  substitution  of 
a  correct  account  analysis  for  a  faulty  one. 

The  auditor  must  supplement  the  omissions  and  de- 
ficiencies in  the  bookkeeping.  These  involve  matters 
which  are  taken  up  in  detail  in  the  sets  accompanying 
this  text,  and  are  too  numerous  and  far  reaching  for  dis- 
cussion in  a  single  chapter. 

63.  The  Audit  for  Mechanical  and  Mathematical 
Accuracy  is  to  show  that  transactions  have  been  properly 
entered;  that  the  proper  accounts  have  been  correctly 
charged  and  credited ;  and  that  the  resultant  trial  balance 
is  correct.  Proceed  as  directed  in  63  B  to  63  D. 

63  B.     Compare  the  vouchers  with  the  entries.     The 
vouchers  consist  of  invoices,  receipts,  legal  papers,  charge 
and  credit  tickets  made  in  the  office,  or  any  other  support- 
ing records.     A  note  should  be  made  of  any  entries  for 
which  no  vouchers  are  found.     They  should  be  supplied, 
if  practicable,  or  attention  should  be  called  in  the  audi- 
tor's record  to  their  absence. 

63  C.  When  the  proof  sheet  or  the  trial  balance  does 
not  foot  equally,  there  is  an  error,  in  the  ledger  or  in  the 
proof  sheet,  or  there  may  be  several  errors,  to  be  dis- 
covered. If  the  bookkeeper  is  generally  accurate,  and 
has  reviewed  all  footings  and  transfers  to  the  trial  bal- 
ance, and  if  the  audit  period  is  short,  there  are  not  likely 
to  be  more  than  one  or  two  errors.  To  locate  these,  pro 
ceed  as  follows : 


AUDITING   (61-70)— Mechanical  Accuracy  75 

(1).  Find  which  side  of  the  ledger  is  short  and  the 
amount  of  the  discrepancy. 

(2).  If  the  error  is  a  number  like  1,  10,  100,  1000, 
or  contains  a  single  figure  with  or  without  ciphers,  review 
the  additions. 

(3).  Review  post  marks  on  the  short  side,  to  dis- 
cover any  omissions  in  posting. 

(4).  Look  for  the  exact  amount  of  the  discrepancy 
on  the  short  side  of  any  posting  books  not  posted. 

(5).  Look  on  the  short  side  of  the  posting  books  for 
one-half  of  the  discrepancy  (if  any  even  number)  which 
may  have  been  posted,  by  mistake,  to  the  long  side. 

(6).  If  the  discrepancy  is  divisible  by  9,  any  of  sev- 
eral transpositions  may  be  suspected;  thus,  29  for  92, 
discrepancy  63;  $51.60  for  $60.51,  discrepancy  $8.91; 
$29.64  for  $24.69,  discrepancy  $4.95 ;  10  cts.  for  $10,  dis- 
crepancy $9.90,  etc.  In  looking  for  a  discrepancy  in  the 
cents  column,  give  no  attention  to  figures  in  the  dollars 
column. 

(7).  See  if  the  ledger  was  out  of  balance  at  the 
beginning  of  the  audit  period.  This  can  be  found  by 
comparing  the  accounts,  as  they  formerly  stood,  with  the 
last  previous  trial  balance,  if  there  was  one.  It  has  hap- 
pened many  times  that  an  error  in  a  previous  trial  balance 
was  discovered,  corrected  in  the  trial  balance,  but  not  in 
the  ledger  account,  with  the  result  that  the  next  subse- 
quent trial  balance  was  wrong. 

(8).  See  if  the  posting-books  are  in  balance  for  the 
audit  period.  A  journal,  sales  book,  cash  book,  voucher 
register,  or  other  posting-book  (especially  if  it  has  many 
columns)  may  not  show  an  equality  of  charges  and 
credits,  with  the  result  that  the  ledger,  after  posting, 
could  not  possibly  balance. 

(9).  Check  back  the  entries.  This  means  to  review 
every  item  posted  during  the  period.  Although  checking 
back  probably  involves  more  labor  than  all  of  the  above 
methods,  it  may  often  be  best  to  do  this  first,  especially 
if  the  bookkeeper's  work  is  evidently  faulty  in  many 


76  AUDITING   (61-70)— Mechanical  Accuracy 

points.  Note  that  it  is  unnecessary  4o  check  back  the 
work  if  the  method  in  63  D  is  followed. 

To  check  back,  arrange  all  posting  books  in  a  given 
order,  and,  as  a  rule,  check  first,  through  all  the  posting 
books,  the  entries  that  have  been  posted  to  the  short 
side.  Place  a  check-mark  before  each  amount  in  both 
posting  book  and  ledger,  using  a  mark  that  is  different 
in  kind  or  color  from  any  used  before. 

If  no  errors  are  found  in  the  short  side,  check  back 
the  long  side. 

If  an  error  is  found  at  any  time,  subtract  it  from  or 
add  it  to  the  amount  of  the  first  discrepancy,  so  that  the 
figures  sought  are  always  before  you. 

If  the  discrepancy  is  not  found,  after  checking,  re- 
view the  ledger  to  see  if  there  are  any  amounts,  within 
the  audit  period,  which  you  have  not  checked. 

By  this  means  a  balance  should  be  found. 

63  D.  Though  a  trial  balance  may  be  taken,  there 
remains  a  question  whether  all  items  were  posted  into 
the  right  accounts.  A  trial  balance  or  prooof  sheet  will 
not  determine  this  question,  as  the  auditor  while  doing 
the  checking  is  occupied  with  pages  and  amounts,  and 
is  likely  to  overlook  titles.  If  the  accounts  are  to  be 
proved,  it  will  not  be  necessary  to  check  back,  as  ex- 
plained above,  but  to  go  directly  to  the  Abstract  of 
the  Accounts.  This  consists  of  rather  large  sheets  of 
paper  ruled  with  pairs  of  columns  (debit  and  credit)  as 
many  as  the  page  will  hold,  in  which  the  amounts  from 
the  posting  books  are  carried. 

Transfer  the  account-titles  from  tin-  ledger  to  the 
columns,  in  the  Abstract  of  Accounts,  leaving  as  much 
space  below  each  title  as  the  entries  under  this  title  will 
require  when  written  in  closely.  To  aid  in  locating  per- 
sonal accounts,  which  may  be  numerous,  place  them  in 
alphabetical  order,  since  the  comparison  is  to  be  by  til  Irs. 
not  by  pages. 

The  general  accounts  (financial  and  business)  will 
be  easily  Incut. •<!  without  rc-;irnm<:cmci)1  if  they  arc  in 


AUDITING   (61-70)— True  Record  77. 

their  places,  if  not,  arrange  them  in  their  proper  order. 
(See  Prin.  72  B.) 

Carry  all  amounts  from  the  trial  balance  at  the  be- 
ginning of  the  audit  period  to  the  abstract,  and  all 
amounts  during  the  period  from  the  posting  books. 

The  results  should  balance  when  the  posting  is  fin- 
ished, and  .each  item  in  the  abstract  of  accounts  should 
check  with  the  previous  trial  balance  taken  from  the 
ledger,  if  the  work  is  correct. 

64.  An  Audit  to  Show  True  Record  goes  into  the 
the  matter  of  the  first  entries  to  determine  whether  they 
are  the  records  of  actual  transactions,  of  which  the  party 
or  department  charged,  received  the  full  benefit.  This 
is  not  entered  into  with  a  view  to  the  discovery  of  fraud- 
ulent intentions,  but  to  determine  whether  there  is  any 
business  laxity  in  failing  to  exact  full  value  for  any  of 
the  obligations  or  payments.  The  following  are  examples 
of  this  kind  of  items:  (1)  entries  for  invoices  before 
receipt  of  tlje  goods  billed,  or  before  the  amounts  of  the 
invoice  are  verified,  or  before  any  allowances  against  the 
bill  are  noted;  (2)  the  charge  of  an  invoice  to  the  wrong 
department;  (3)  cash  payments  without  any  equivalent 
item,  (an  instance  of  the  last  mentioned  is  the  acceptance 
by  a  city  council,  and  payment  to  an  agent,  for  the 
purchase  of  a  park  buffalo  which  was  neither  purchased 
nor  received) ;  (4)  donations  of  the  firm's  funds  to  char- 
itable ends,  by  individuals  in  the  firm,  or  the  taking  of 
firm  goods  for  personal  use  by  partners;  (akin  to  this, 
is  the  action  of  the  bank  teller  who,  on  days  when  cash 
was  "over,"  placed  the  surplus  in  a  box,  to  be  returned 
to  the  till,  on  days  when  cash  was  "short;"  (5)  laxity 
in  collections,  until  claims  become  outlawed  or  otherwise 
uncollectible.  Serious  matters,  along  this  line,  concern 
the  entry  of  assets  which  do  not  exist,  or  which  have  not 
the  value  shown  on  the  ledger.  There  might  be  entries 
of  real  property,  of  great  value,  to  which  the  firm  has 
no  recorded  title,  or  against  which  there  are  liabilities 
not  shown  on  the  books.  Obsolete  patterns,  models  and 


78  AUDITING   (61-70)— True  Record 

machinery,  may  be  carried  on  the  books  at  a  nominal 
value,  after  they  are  worthless.  There  is  a  case  of  a 
ship  load  of  hemp  appearing  on  the  books  as  an  asset, 
ten  years  after  the  vessel  and  cargo  foundered  in  mid 
ocean.  Any  injury  to  property  by  fire  or  accident  must 
also  be  charged  off. 

Ordinary  depreciation  in  property  should  be  repre- 
sented in  sufficient  reserves. 

The  false  record  that  has  probably  caused  most 
havoc  among  business  men  is  the  .inflated  inventory. 
Every  dollar  of  inflation  in  an  inventory  is  that  much 
deception  as  to  profits.  The  inventory  may  contain  items 
not  really  in  stock,  or  may  be  priced  too  high,  or  may 
contain  old  and  worthless  stock  at  the  price  it  was  worth, 
which  amounts  to  the  same  thing.  The  auditor  must  use 
care  to  discover,  if  possible,  what  the  goods  are  really 
worth. 

The  ledger  may  show  intangible  assets,  which  are 
not  only  intangible,  but  that  do  not  exist.  Good  Will 
account  is  sometimes  in  this  condition ;  Patent  Right  and 
Copy  Right  accounts  often  are. 

The  liability  accounts  also  demand  inspection.  Are 
all  accounts  payable  and  bills  payable  on  the  books  en- 
tered at  their  full  amount?  Have  bills  receivable,  when 
discounted,  been  entered  as  contingent  liabilities?  Is  the 
firm  liable  on  accommodation  paper? 

The  books  which  show  either  an  inflation  in  assets 
or  a  false  diminution  in  liabilities,  require  adjustment. 

A  firm's  books  may  show  a  condition  contrary  to 
the  foregoing,  that  is,  assets  may  be  entered  too  low,  or 
liabilities  too  high,  resulting  in  a  showing  of  less  worth 
or  capital  than  the  business  really  posseses.  Such  a  con- 
dition, called  a  secrete  reserve,  may  work  hardship  on 
the  shareholders  of  a  corporation,  who  may  be  entitled 
to  dividends  which  do  not  show  on  the  books,  or  who 
may  be  induced  to  sell  their  stock,  while  believing  it  to 
be  worth  less  than  it  really  is. 

The  capital  stock  account  may  need  auditing.    There 


AUDITING   (61-70)— True  Record  79 

are  many  ways  in  which  this  account  may  be  misleading. 
It  would  be  difficult  to  estimate  the  number  of  corpora- 
tions that  have  been  at  fault  in  issuing  shares  of  stock  to 
individuals  in  exchange  for  promissory  notes,  or  for  con- 
siderations other  than  cash,  the  value  of  which  is  less 
than  the  par  value  of  the  stock. 

The  Cash  account  needs  looking  into  for  uninten- 
tional regularities.  Is  the  balance  in  the  cash  book  all 
real  money?  A  cash  balance  running  into  four  figures 
has  been  known  to  represent  a  few  coins,  a  few  bills  and 
a  large  quantity  of  expense  tickets,  due  bills,  protested 
paper  and  other  items  carried  in  the  hope  of  a  future 
convertion  into  money. 

Is  the  bank  account  correct?  This  can  best  be  as- 
certained by  a  reconciliation  of  the  bank  statement  with 
the  depositor's  record  discussed  in  detail  in  Prin.  64  B. 

64  B.  Reconciliation  of  Bank  Statement.  A  bank 
usually  delivers  a  statement  of  the  checking  account  to 
the  depositor  on  the  first  of  the  month.  This  statement 
is  accompanied  with  the  depositor's  paid  and  cancelled 
checks,  which  should  agree  with  the  debits  in  the  state- 
ment. The  deposits,  as  credited  in  the  statement,  should 
agree  with  the  amounts  entered  in  the  depositor's  bank 
book  or  his  bank  account.  The  difference  between  total 
deposits  and  total  checks,  as  appearing  on  the  statement, 
is  entered  by  the  bank  as  a  balance  due  the  depositor. 

If  the  balance  on  the  statement  agrees  with  the  bal- 
ance in  the  depositor's  books,  the  statement  is  assumed 
to  be  correct,  without  further  attention,  except  that  the 
checks  should  be  compared  with  the  depositor's  entries, 
in  order  to  make  sure  that  no  cancelled  checks  are  mis- 
sing. This  comparison  is  indicated  by  check-marks  in 
the  depositor's  cash  book. 

For  several  reasons,  the  bank  balance  does  not  often 
agree  with  the  depositor 's  balance  on  a  given  day ;  among 
these  reasons  are:  (1)  certain  checks  issued  by  the  de- 
positor may  be  in  *transit;  (2)  deposits  charged  to  the 
bank,  on  the  depositor's  books  at  the  end  of  the  month 


80  AUDITING   (61-70)— True  Record 

may  not  have  been  credited  by  the  bank  during  the 
month  covered  by  the  statement;  (3)  the  bank  may  have 
made  charges  for  collections  or  other  items,  from  its  own 
tickets,  which  have  not  been  credited  on  the  depositor's 
account;  (4) the  bank  may  have  credited  collections  made 
for  the  depositor,  which  the  latter  has  not  entered;  (5) 
there  may  be  mistakes  in  the  bank  statement  or  in  the 
depositor's  account. 

To  reconcile,  make  additions  to  and  deductions  from 
the  balance  reported  in  the  bank  statement,  as  follows: 

(1).  Check  your  record  of  checks  issued,  with  the 
charged  and  cancelled  checks  returned;  If  any  checks 
are  found  to  be  in  transit,  subtract  their  sum  from  the 
balance  shown  on  the  bank  statement. 

(2).  Check  your  record  of  deposits  with  the  de- 
posits entered  in  the  statement;  if  any  deposits  are  mis- 
sing from  the  statement,  add  their  sum  to  the  bank's 
balance. 

(3).  Check  the  bank  statement  to  discover  any 
petty  charges  made  by  the  bank  that  you  have  not  had 
notice  of,  or  have  not  credited.  If  any  are  found,  add 
their  sum  to  the  bank's  balance.  (Do  not  overlook  in;ik 
ing  an  entry  of  them  in  your  current  account,  if  they  are 
allowed.) 

(4).  Look  for  any  credit  given  in  the  bank  state- 
ment for  collections  or  other  items  that  have  not  been 
entered;  if  any  are  found,  subtract  their  sum  from  the 
bank's  balance  as  shown  on  the  statement.  (Do  not 
neglect  to  make  an  entry  in  your  current  account  for 
such  items.) 

(5).  If  there  are  errors  either  on  the  bank  state- 
ment or  in  your  account,  revise  the  bank  balance  for  the 
errors  in  the  bank  statement,  making  memoranda  in  red 
ink,  showing  the  revision,  or  revise  your  own  account  for 
your  errors,  as  the  case  may  be. 

After  you  have  accounted  for  discrepancies  between 
the  two  accounts,  report  to  the  bank  any  errors  in  the 
bank  statement  and  have  these  corrected. 


AUDITING   (61-70)— Fraud  81 

Pin  to  the  bank  statement  the  sheet  on  which  the 
foregoing  computations  have  been  made,  in  order  to 
show  the  reconciliation  of  the  two  accounts,  and  file  them 
for  reference  when  you  reconcile  the  next  following 
statement. 

65.  An  Audit  to  Show  Fraud  or  Its  Absence  in- 
volves tests  to  show  whether  or  not  defalcation,  embezzle- 
ment, or  misrepresentation  has  occurred.  These  may  take 
several  forms;  among  them,  are,  (1)  defalcation  of  cash 
or  securities;  (2)  misappropriation,  or  theft  of  property; 
(3)  misrepresentation  of  business  condition  'to  the  injury 
of  investors  or  outside  persons. 

65  B.  Such  an  audit  goes  into  the  matter  of  the 
discharge  of  trust  delegated  to  officers  and  employees  or 
other  agents,  of  the  concern.  The  direct  question  to  be 
answered  is,  "Has  any  one  misappropriated  cash  or  prop- 
erty, or  made  any  showing  on  the  books  that  would 
cause  either  investors  or  outside  parties  to  take  unwar- 
ranted financial  risks?" 

Where  deliberate  fraud  is  practiced,  the  conceal- 
ment may  be  more  or  less  ingenious,  depending  upon  the 
skill  of  the  offender;  yet  in  the  great  majority  of  cases 
when  a  fraudulent  entry  is  discovered,  that  entry  affords 
the  key  to  the  entire  defalcations,  for  embezzlers,  as  well 
as  others,  do  not  wish  to  confuse  themselves  by  a  variety 
of  methods. 

It  is  the  province  of  accountancy  to  outline  account- 
ing records  of  such  a  nature  that  the  opportunity  for 
concealment  is  reduced  to  the  minimum.  Systems  can 
be  devised,  that,  if  followed  out  to  the  letter,  would  re- 
duce the  risks  of  fraud  to  a  negligible  quantity.  But  to 
avoid  the  expense  of  operating  such  systems,  certain  safe- 
guards are  often  omitted;  especially  where  the  reputa- 
tion and  moral  qualities  of  the  trusted  persons  entitle 
them  to  confidence,  or  where  the  risk  is  not  great.  There 
is  a  widespread  disposition  among  business  men  to  pay 
larger  salaries  to  employes  who  are  trustworthy,  rather 
than  to  provide  mechanical  safeguards  against  fraud, 


82  AUDITING   (61-70)— Fraud 

the  added  expense  of  which  would  necessitate  lower 
salaries. 

The  first  safeguard,  then,  is  a  suitable  accounting 
system  which,  so  far  as  practicable,  eliminates  oppor- 
tunities for  the  grosser  forms  of  attempt  at  fraud.  The 
student  who  has  followed  the  bookkeeping  sets  in  this 
text  should  be  familiar  with  the  more  important  of  these 
safeguards  provided  by  good  accountancy. 

In  looking  for  fraud,  the  auditor  should  first  de- 
termine how.  far  the  bookkeeping  system  in  use  affords 
a  check,  and  how  faithfully  this  check  has  been  carried 
out;  then  he  must  devise  and  put  into  execution  such 
further  tests  as  may  be  needed  to  reduce  the  matter  to 
a  reasonable  degree  of  certainty.  Among  these  tests  are 
the  following: 

65  C.  Defalcation  of  Cash  or  Securities.  The  audi- 
tor's first  step  is  to  count  the  cash  actually  on  hand. 
This  means  to  make  list  of  the  money,  checks,  or  what- 
ever passes  as  cash,  whether  in  the  till  or  cash  drawer, 
or  in  the  safe  or  vault — all  cash  and  the  bank  balance, 
if  this  is  included  in  the  cash  account.  This  should 
agree  with  the  cash  book  balance  taken  at  the  time  the 
cash  is  counted. 

Before  going  further,  keep  in  mind  that  many  tricks 
may  be  practiced  on  the  cash  drawer  by  which  the  cashier 
may  abstract  money  without  making  any  permanent 
record.  To  do  so  is  foolish  as  well  as  dishonest,  but  both 
foolish  and  dishonest  people  continue  to  take  the  places 
of  those  already  in  jail.  Among  these  devices  of  the 
tricky  cashier  are  the  following: 

(1).  The  cashier  may  simply  take  an  amount  out  of 
the  drawer,  and  leave  in  its  stead  a  cash  ticket  which  is 
counted  as  so  much  money.  This  looks  like  a  harmless 
practice  because  there  are  times  when  one  must  take 
cash  for  a  purchase  or  a  payment  of  some  amount  not 
yet  determined,  the  intention  being  to  return  the  unused 
cash,  make  a  charge  for  the  amount  spent,  and  destroy 
the  memorandum  ticket.  Such  tickets  should  be  ex- 


AUDITING   (61-70)—  Fraud  83 

amined  closely,  for  a  ticket  of  that  kind  should,  as  a  rule, 
not  be  over  a  day  old. 

(2).  A  cashier  may  take  a  perpetual  loan  out  of  the 
cash  drawer  in  this  wise:  A  customer  may  pay  an 
amount,  say  $100,  for  which  the  cashier  makes  a  credit 
ticket  dated  one  day  later.  He  makes  no  entry  of  the 
ticket  on  the  day  received,  and  "borrows"  the  cash  for 
his  own  use.  The  following  day  he  credits  the  ticket 
properly  (except  one  day  late)  and  holds  out  credit  for 
another  payment  or  other  payments,  enough  to  make 
the  $100,  which  is  borrowed  from  the  next  day,  and  so  on, 
indefinitely.  As  the  larger  collections  are  usually  checks, 
the  dishonest  cashier  must  pay  into,  or  take  out  of,  the 
drawer  the  difference  between  the  original  $100,  and  the 
nearest  approach  he  can  make  to  the  required  amount, 
or  else  increase  or  diminish  his  "loan."  An  auditor 
should  compare  the  dates  of  all  checks  and  drafts  in  the 
drawer  with  the  dates  of  entry  in  the  books,  and  the  date 
of  the  receipt  if  possible.  Where  remittances  are  re- 
ceived through  the  mail,  the  date  of  receipt,  even  to  the 
hour,  if  necessary,  should  be  stamped  on  the  letters. 

(3).  There  may  be  dummy  checks  in  the  drawer, 
that  is,  imitations  of  checks  left  there  to  be  counted  as 
cash. 

Having  satisfactorily  shown  that  the  cash  on  hand 
agrees  with  the  cash  balance,  the  next  step  is  to  follow 
the  receipts  and  payments  of  cash  during  the  audit 
period. 

(4).  A  cash  balance  may  have  been  forced,  that  is, 
a  smaller  amount  than  the  real  balance  may  have  been 
placed  in  the  books,  and  footings  entered  as  equal,  when 
they  really  would  not  be  equal  if  properly  added.  Such 
a  forced  balance  necessitates  an  equal  change  in  some 
amounts  posted  to  the  ledger ;  in  other  words,  an  amount 
from  the  cash  book  must  be  omitted  in  the  ledger,  or 
else  posted  as  an  amount  sufficient  to  equalize  the  dis- 
crepancy in  cash.  Thus,  cash  might  be  forced,  $9.90  and 
an  item  of  $10  posted  as  1*0  cents  to  satisfy  the  trial 
balance. 


84  AUDITING   (61-70)— Fraud 

The  way  to  detect  a  forced  cash  book,  is  to  review 
the  footings.  Although  the  cash  book  may  have  been 
balanced  many  times  during  the  audit  period,  the  debits 
and  credits  can  be  footed  separately  on  two  lists  covering 
the  entire  period.  Whatever  the  number  of  columns  in  a 
cash  book,  there  should  be  one  column  for  net  cash  re- 
ceipts, and  one  "for  net  cash  payments.  In  some  cash 
books,  this  may  not  be  the  case.  Then  the  items  must 
be  picked  out  of  various  columns. 

(5).  After  the  cash  book  is  found  to  be  mechan- 
ically correct,  the  cash  payments  demand  attention. 
Cash  may  have  been  taken  out  and  wrongfully  charged 
to  some  nominal  account.  The  accounts  of  Expense, 
Merchandise  Bought  and  unclassified  losses  should  be 
examined  with  a  view  to  unreasonable  or  unnatural 
charges.  Also,  the  vouchers  should  be  scrutinized,  and 
all  payments  should  be  reviewed  with  care.  Payments 
to  persons,  if  in  the  correct  amounts,  are  assumed  to  be 
correct,  otherwise  there  would  be  complaint  from  the 
persons  paid. 

(6).  The  cash  receipts  demand  attention.  Were 
the  amounts  entered  on  the  debit  or  receiving  side  of  the 
cash  book  the  amounts  actually  received?  Were  the  dis- 
counts deducted  from  customers '  invoices  actually  al- 
lowed? Attention  may  be  called  to  allowances,  recorded 
as  deducted  from  bills,  although  neither  called  for  nor 
allowed.  For  example,  a  remittance  of  $100  on  account 
might  be  entered  for  only  $80,  and  an  entry  made  credit- 
ing the  customer  for  $20  allowed  for  damaged  goods  or 
other  cause.  For  this  reason,  n -hates  and  allowanr.  s 
need  attention. 

It  in  doubt  as  to  the  correctness  of  the  entri* 
checks  and  drafts  received,  secure  the  deposit  tickets. 
for  the  period,  from  tin-  bank,  and  compare  tin-  it  mis 
thereon  with  the  entries  in  the  cash  book.  Tin-  bank 
account  ilsrlt  may  be  carried  on  the  books  at  a  grc.it  •  r 
than  the  i-ml  balanc-.-.  Reconcile  the  hank  statcim-iil. 
(Prin.  64  B.) 


AUDITING   (61-70) — Fraud  83 

(7).  Securities  (stocks,  bonds  and  notes)  must  be 
checked  to  see  that  they  are  all  there,  are  genuine,  and 
that  they  agree  with  the  records.  The  matter  of  dates 
and  signatures  of  notes  is  important.  A  spurious  note 
might  represent  the  loss  of  a  great  deal  of  money. 

The  foregoing  suggestions  afford  a  beginning  from 
which  the  auditor  may  extend  research  as  occasion 
demands. 

65  D.  An  Audit  to  Show  Misappropriation  of  Prop- 
erty refers  to  the  kind  of  property,  how  it  is  held,  and 
the  system  of  records  already  pertaining  to  it. 

Commodities  in  store  room,  warehouse  or  with  agents, 
or  wherever  kept,  are  easily  abstracted  unless  properly 
guarded. 

If  charges  are  made  for  merchandise  bought  when 
it  is  suspected  that  the  goods  were  not  received,  an 
auditor  should  first  eliminate  the  invoices  from  reputable 
houses,  whose  statements  show  agreeing  entries.  Having 
found  such  to  be  correct,  there  may  remain  miscellaneous 
purchases  of  a  more  or  less  irregular  nature.  These  may 
be  traced  in  various  ways.  If  there  is  no  invoice  from 
the  seller,  there  is  likely  to  be  at  least  a  memorandum  of 
what  was  bought.  Anything  bought  would  ordinarily 
be  either  sold,  used,  destroyed  or  still  in  stock.  If  none 
of  the  last  three  dispositions  can  be  shown  to  account 
for  purchased  goods,  a  record  of  the  sale  should  exist. 
Certain  items  especially  looked  for,  may  be  checked 
through  the  sales  records  to  show  disposition.  A  suffi- 
cient number  of  such  items,  thus  verified,  should  estab- 
lish a  fair  presumption  that  all  are  correct. 

Managers  of  branch  stores  and  other  agents  having 
goods  in  stock  belonging  to  the  principal,  should  render 
periodic  inventories  of  stock  on  hand.  The  correctness 
of  the  inventories  must  be  verified  by  checking  the  in- 
ventory with  the  goods,  where  practicable. 

A  rough  way  of  determining  whether  there  is  any 
great  loss  in  stock,  is  to  compare,  from  previous  periods, 
the  average  percent  profit  on  merchandise  sold.  By 


86  AUDITING   (61-70)— Fraud 

deducting  this  percentage  from  the  total  sales  of  an 
audit  period,  a  remainder  would  be  left  which  should 
approximate  the  cost  of  the  merchandise  sold  for  the 
period.  The  auditor  must  use  his  judgment  as  to  apply- 
ing this  plan,  as  conditions  differ. 

Goods  may  be  passed  out  of  the  store  and  charged 
to  fictitious  persons.  An  examination  of  the  accounts 
receivable  would  probably  disclose  any  such.  This  ex- 
amination should  extend  especially  to  overdue  accounts, 
or  accounts  containing  irregular  entries. 

A  shortage  in  the  inventory  may  be  fraudulently 
covered  by  raising  the  prices  in  a  subsequent  inventory 
over  what  they  were  in  a  previous  inventory.  See 
whether  this  has  been  done. 

65  E.  A  Misrepresentation  of  the  Business  may  be 
made  to  accomplish  fraud  upon  investors  or  creditors. 
An  insolvent  bank  may  be  represented  as  solvent,  in 
order  to  attract  deposits  which  are  likely  not  to  be  re- 
paid. A  merchant  may  represent  himself  as  being  worth 
more  than  he  is,  in  order  to  secure  larger  credit  in  goods 
or  money  than  he  otherwise  is  entitled  to.  A  business 
manager  may  overstate  the  profits  of  a  given  period,  in 
order  to  secure  the  approval  of  stockholders  and  a  con- 
tinuance of  management.  Directors  of  a  company  may 
declare  and  pay  dividends  on  stock,  by  borrowing  money 
to  do  so,  or  by  taking  the  so-called  dividends  out  of  the 
capital.  This  is  done  to  make  the  stock  appear  more 
valuable  than  it  is,  and  thus  attract  other  investors.  On 
the  other  hand,  the  profits  of  a  business  may  be  con- 
cealed, although  great  enough  to  entitle  stockholders  to 
receive  dividends  which  are  not  declared.  Under  such 
conditions,  dissatisfied  stockholders  might  be  induced  to 
sell  their  stock  for  less  than  it  is  worth. 

Many  kinds  of  misrepresentation  have  been  used  to 
make  the  business  appear  either  better  or  worse  than  it 
really  is.  The  auditor  should  proceed  under  such  con- 
ditions as  outlined  in  Prin.  64. 


AUDITING   (61-70)— System  87 

66.  An  Audit  to  Show  Suitable  Books  involves  a 
knowledge  of  the  business  considered,  so  far  as  its  needs 
of  record  are  concerned,  and  a  knowledge  of  the  most 
suitable  books  and  records  for  the  transactions  and  op- 
erations. The  auditor  should  begin  with  an  outline  of 
books,  rulings,  records,  etc.,  theoretically  suited  to  the 
conditions. 

He  should  compare  the  books  under  examination, 
step  by  step,  with  the  system  he  has  in  mind,  and  should 
look  for,  and  note,  the  specific  deficiencies  of  the  former, 
and  make  a  note  of  the  economies  or  advantages  pos- 
sible. 

Changes  advised  by  an  auditor  should  not  be  of  in- 
definite advantage,  but  should  compute  time  saved  by 
the  proposed  method,  on  the  basis  of  a  year;  the  specific 
economies  to  be  effected  should  be  reduced  to  dollars  and 
cents,  and  the  safeguards  should  be  suggested,  with  a 
good  reason  for  them. 

He  should  propose  changes,  with  a  view  to  retaining 
all  of  the  old  features  that  can  be  made-  to  work  in  with 
his  plan.  To  change  a  bookkeeper's  long  established 
habits,  is  to  take  away  from  him  facility  of  action  which 
it  has  taken  time  to  acquire.  For  example,  a  bookkeeper 
who  has  posted  from  right  to  left  for  many  years,  would 
probably  make  many  mistakes  and  go  through  much 
hardship  in  learning  to  post  from  left  to  right  with  any- 
thing like  equal  ease.  To  even  change  the  position  of  a 
light  might  disturb  a  habit,  and  give  rise  to  numerous 
errors.  The  auditor  must  study  the  working  force  as 
well  as  the  system. 

Again,  it  is  practically  useless  to  recommend  an 
otherwise  good  system,  that  will  show  results  so  finely 
analyzed  that  the  manager  himself  cannot  understand  it, 
or  will  not  use  it.  This  great  mistake  has  been  made 
by  many  well-intentioned  systematizers,  who  gauged  the 
manager's  power  to  grasp  and  utilize  information  derived 
from  the  books,  by  their  own  practice  in  this  direction. 
The  auditor  must  keep  in  mind  that  the  manager  often 


88  AUDITING   (61-70)— Worth  and  Earning  Power 

gauges  the  capacity  of  every  one  else  by  his  own.  The 
constructive  auditor  should  recommend  office  changes 
with  a  careful  regard  to  the  ability  of  those  who  are  to 
utilize  the  system,  as  well  as  to  the  ideal  advantages  of 
the  system  itself. 

He  should  not  feel  that  his  labor  is  wasted  merely 
because  he  cannot  secure  the  installment  of  as  fine  a 
bookkeeping  system  as  he  would  like.  He  has  done  his 
part  when  he  has  provided  the  best  that  his  employer 
can  use.  Even  when  his  well-considered  plans  are  re- 
jected, he  may  feel  some  satisfaction  in  knowing  that 
more  than  one  great  business  organization  owes  its  ex- 
istance  to  a  manager  who  understood  bookkeeping  better 
than  his  fellows. 

67.  An  Audit  to  Show  Worth  and  Earning  Power 
involves  the  verification  of  existing  records,  and  the 
preparation  of  such  additional  data  as  is  needed  to 
answer  the  questions:  "What  is  the  physical  worth  of 
the  property?"  "What  does  it  earn  per  year?" 

The  exhibit  from  the  books  may  be  complete,  correct, 
and  satisfactory,  or  it  may  be  only  partial,  but  good  so 
far  as  it  goes.  Where  the  system  falls  short,  constructive 
auditing  begins. 

67  B.  The  worth  of  the  business  is  exhibited  in  the 
financial  ledger,  or  where  the  different  groups  of  ac- 
counts are  not  segregated,  in  the  capital  or  financial 
accounts.  These  consist  of,  (1)  cash  and  cash  collectible  ; 
(2)  floating  property;  (3)  fixed  property;  (4)  specula- 
tive property;  (5)  intangible  property;  (6)  indebtedness 
to  persons  outside  the  firm;  (7)  indebtedness  to  the 
owners. 

Cash,  accounts,  notes,  and  other  claims,  should  be 
verified  as  to  amounts  and  collectibility ;  floating  prop- 
erty should  be  verified  from  inventories,  as  should  also 
unrecorded  amounts  of  money  due  (for  example,  ac- 
crued interest,  rent  or  insurance  prepaid).  Fixed  prop- 
erty should  appear  itemized  in  the  ledger  at  cost;  and  de- 
preciation should  be  represented  in  reserve  accounts. 


AUDITING   (61-70) — Worth  and  Earning  Power  89 

Speculative  property  should  be  viewed  particularly  as 
to  its  present  worth,  and  a  sufficient  reserve  account 
kept  to  make  good  any  fall  in  value.  Intangible  prop- 
erty should  be  examined  with  a  view  to  the  expiration 
of  its  value,  and  the  required  amount  to  be  written  off. 

The  liabilities  should  be  carefully  gone  over  to  see 
that  all  are  included.  Often  a  search  for  contingent 
liabilities  will  disclose  matters  that  should  be  recorded. 
The  owners'  credits  consist  of  reserves,  surplus,  undi- 
vided profits,  and  capital.  The  reserves  must  be  looked 
into  to  see  what  portion,  if  any,  should  be  allotted  to 
depreciation,  bad  debts  or  other  shrinkage  in  assets. 

Having  reduced  all  of  the  above  to  their  correct 
value  as  assets  and  liabilities,  the  net  worth  of  the  busi- 
ness may  be  found  from  their  assemblage  in  a  financial 
statement. 

67  C.  Having  determined  the  net  worth  of  the  busi- 
ness, the  profits  for  the  year  are  found  by  comparison  of 
the  present  net  worth  with  the  net  worth  at  the  begin- 
ning of  the  year.  The  profits  may  be  found  analyzed 
in  more  or  less  detail  in  the  nominal  accounts,  if  such 
have  been  kept. 

The  net  profit  of  the  current  year  should  undergo 
comparison  with  the  net  profits  of  preceding  years,  to 
determine,  (1)  the  average  profit,  year  after  year;  (2) 
whether  the  annual  profits  have  been  variable — some 
years  much  more  than  others — and  the  reasons  for  any 
such  variations  should  be  clearly  established. 

Furthermore,  it  is  essential  that  an  apparent  net 
profit  be  analyzed,  to  see  whether  it  is  profit  resulting 
from  the  revenues,  or  from  capital  and  fluctuation. 
Thus,  the  fortunate  sale  of  real  estate  owned  by  a  fac- 
tory, might  swell  the  gains  of  a  certain  year  to  double 
their  ordinary  amount,  while  the  business  profits  might 
be  the  same  as  before.  A  stock  of  goods  purchased 
before  a  war  or  other  great  disturber  of  values,  might 
be  sold  for  double  or  treble  its  former  value.  Profits 


90  AUDITING   (61-70)— Legal  Aspects 

under  such  circumstances  as  these,  are  not  a  criterion 
as  to  the  earning  power  of  the  business. 

68.     Legal  Aspects: 

The  Exchanges  between  persons  as  recorded  in  book- 
keeping, are  assumed  to  be  in  accordance  with  contracts, 
but,  in  ordinary  selling,  the  details  of  these  contracts 
are  not  often  referred  to,  it  often  being  understood  that 
they  are  determined  by  custom.  This  may  sometimes 
give  rise  to  misapprehensions  that  have  a  decided  bear- 
ing on  the  condition  of  the  business,  or  of  the  individual 
investors,  and  an  auditor  should  not  overlook  them. 
Persons  frequently  enter  into  business  relations  without 
clearly  understanding  the  risks  involved,  and  may  not 
properly  safeguard  their  own  interests.  Also,  they  may 
have  overlooked  rights  which  would  materially  advance 
their  interests  if  enforced.  A  number  of  matters  relating 
to  the  legal  aspects  of  business  are  referred  to  in  this 
chapter. 

68  B.  Sale  of  Goods.  To  sell,  is  to  transfer  prop- 
erty in  the  thing  sold  for  a  money  consideration.  The 
seller  of  commodities  is  chiefly  interested  in  knowing 
whether  a  supposed  sale  of  merchandise  is  really  a  sale, 
when  the  transfer  takes  place,  and  who  is  to  bear  the 
legal  risks  of  losses  in  connection  with  the  sale. 

A  sale  is  the  execution  of  a  contract.  This  consists 
of  an  offer  on  the  part  of  the  seller  and  its  acceptance 
on  the  part  of  the  buyer,  or  the  reverse,  which  is  suffi- 
ciently definite  to  be  enforced  by  legal  measures. 

Having  made  a  contract  to  sell,  the  important  <iues- 
tion  arises  as  to  whether  the  sale  has  been  so  made  that 
the  buyer  cannot  legally  avoid  payment. 

Sales  of  goods  on  credit  are  made  cither  on  a  vn-b.-il 
or  a  written  order,  which  order  is  delivered  to  the  seller 
or  to  his  {inthori/ed  ;i«r<-nt. 

(1).  If  tin  verl>;d  order  without  any  restrici  inns. 
the  acceptance  of  the  commodity  by  the  buyer  is  evidence 
of  his  ntfiMMMiient  to  pay  for  it.  It'  no  price  is  specified. 
the  regular  published  price,  or  the  regular  market  price 


AUDITING   (61-70)— Legal  Aspects  91 

of  the  goods  on  the  day  named  is  collectible.  To  avoid 
paying  for  goods,  the  buyer  may  refuse  to  accept  them 
when  they  are  offered,  or  else  must  show  that  they  were 
not  as  represented. 

(2).  When  goods  are  sold  on  unqualified  written 
order  by  mail,  wire,  or  messenger,  the  transfer  of  the 
property  from  the  seller  to  buyer  ordinarily  takes  place 
when  the  seller  delivers  the  goods  to  the  railroad  or 
other  carrier  as  designated  or  implied  in  the  order.  In 
this  case  any  loss  or  injury  to  the  property  while  in 
transit,  or  any  risk  incurred  in  connection  with  it  is 
borne  by  the  buyer,  who  looks  to  the  carrier  for  damages. 

(3).  Either  the  offer  to  sell  or  the  order  for  the 
goods  may  specify  certain  conditions  of  time  or  place ; 
that  would  place  the  risk  upon  the  seller.  Thus  when 
sale  is  made  "on  approval,"  the  goods  may  be  received 
by  the  buyer,  examined  and  refused.  In  that  case  the 
seller  is  under  obligation  to  see  to  their  return.  But  if 
the  buyer  holds  the  goods  without  refusal,  beyond  the 
time  set,  or  beyond  a  reasonable  time,  if  no  time  is  set, 
his  acceptance  is  implied,  and  the  account  would  prob- 
ably be  collectible. 

(4).  Manufacturers  and  others  desiring  to  promote 
the  sale  of  goods,  sometimes  ship  them  out  "on  sale," 
that  is,  to  be  paid  for  when  the  buyer  sells  them.  In 
such  case,  the  buyer  is  accountable  in  cash  for  the  part 
that  he  has  sold.  When  goods  are  regularly  kept  on 
sale,  it  is  customary  for  the  selling  agent  to  render 
statements  and  remit  proceeds  of  sales  monthly,  quar- 
terly, or  annually.  The  conditions  should  be  specified  in 
a  written  contract. 

(5).  The  sale  of  goods  C.  0.  D.,  gives  rise  to  a 
variety  of  legal  opinions  as  to  whether  the  title  to  the 
goods  passes  at  the  time  of  sending  the  goods  out  of  the 
sales  room,  or  at  the  time  they  are  received  by  the 
buyer.  Since  the  terms  signify  that  the  buyer  is  not 
entitled  to  possession  until  he  pays  for  them,  the  practi- 
cal outcome  is,  that  regardless  of  any  legal  rights,  the 


92  AUDITING   (61-70)— Legal  Aspects 

seller  generally  pays  the  expense  of  their  transportation 
both  out  and  in,  if  they  are  refused. 

(6).     In  some  instances,  the  title  passes  without  the 
property  being  handled  at  all,  as  when  grain  transferred 
by  the  delivery  of  warehouse  receipts,  or  where  title  to  . 
property  is  transferred  by  delivery  of  a  bill  of  sale. 

68  C.  Collection  of  Accounts  and  Notes.  After  a 
time-sale  is  made,  provision  must  be  made  for  collection. 
The  first  step  is  usually  to  send  the  customer  a  state- 
ment of  the  amount  owed  on  the  first  of  the  month 
following  the  sale.  This  statement  may  not  be  a  re- 
minder to  pay,  if  the  account  is  not  due;  it  may  merely 
afford  the  customer  an  opportunity  to  compare  accounts 
and  note  discrepancies.  Where  the  account  is  due,  the 
statement  is  regarded  as  a  notice  that  payment  is 
expected. 

(1).  Wholesalers  usually  allow  customers  a  certain 
term  of  credit,  but  offer  a  discount  from  the  bill,  for 
immediate  or  early  cash  payment.  As  a  cash  discount  is 
usually  considerably  more  than  the  current  rate  of  in- 
terest on  the  amount  for  the  given  time,  the  seller  has  a 
right  to  assume  that  a  customer  who  will  not  take  a 
cash  discount  is  either  unable  to  borrow  money  of  his 
banker  to  meet  bills,  or  is  negligent  of  the  profit  he  could 
make  by  discounting.  In  either  case,  the  customer's 
credit  is  affected  and  his  account  is  to  be  more  closely 
watched. 

(2).  When  the  unpaid  account  becomes  due.  <-i 
letter  of  reminder  is  usually  sent.  This  bringing  no  re- 
sponse, a  notice  of  sight  draft  may  follow,  and  a  sight 
draft  on  the  customer  for  the  amount  may  be  sent  to  a 
bank  for  collection.  If  still  unpaid,  coiTrspnmlrncr 
should  disclose  the  reason  for  non-payment.  It  may 
be  that  more  time  is  desired.  This  is  frequently  granted 
by  taking  the  customer's  note  to  settle  the  account. 
This  resolves  the  debt  into  a  form  to  be  more  easily 
handled,  besides  making  it  draw  a  specified  rate  of  in 


AUDITING   (61-70)— Legal  Aspects  1)3 

terest,  and  extending  the  period  beyond  which  it  would 
be  outlawed. 

Doubt  as  to  the  customer's  ultimate  ability  to  pay 
might  justify  the  taking  of  a  mortgage  on  his  real  or 
personal  property  to  secure  the  debt. 

In  extreme  cases,  d  mortgage  given  would  be  fol- 
lowed by  foreclosure,  and  the  sale  of  the  mortgaged 
property,  with  a  view  to  apply  the  proceeds  on  the  debt. 

(3).  If  other  means  fail,  the  debtor  may  be  sued 
for  the  account  or  note,  and  if  the  claim  be  proved  cor- 
rect, a  judgment  will  be  entered  against  the  debtor. 
This  would  be  followed  by  a  forced  sale  through  a  court 
officer  of  any  of  the  debtor's  property  which  is  not  ex- 
empt from  execution.  The  legal  expenses  of  securing 
judgment  are  paid  by  the  creditor,  and,  with  the  excep- 
tion of  lawyers'  fees,  are  added  to  the  claim  against  the 
debtor. 

(4).  An  account,  note,  or  judgment  may  remain 
unpaid  for  so  long  a  time  that  the  debtor  can  refuse 
payment  under  the  statute  of  limitations.  There  is  much 
variation  in  the  different  states  as  to  the  time  when  this 
statute  applies.  It  may  be  from  two  to  eight  years,  on 
accounts ;  from  three  to  fifteen  years  on  notes ;  and  from 
five  to  twenty  years  on  judgments.  When  this  time 
has  expired  in  the  several  cases,  the  debtor  may  plead  the 
statute  of  limitations  and  thus  avoid  payment. 

68  D.  The  Purchase  of  Land  is  a  more  formal  mat- 
ter than  the  purchase  of  goods,  and  must  be  evidenced 
by  a  written  contract,  called  a  deed,  which  is  given  by 
the  seller  to  the  buyer.  Land  is  perpetual,  and  title  to 
it  is  a  matter  that  in  course  of  time,  passing  through 
many  hands,  would  be  hopelessly  confused,  if  a  public 
record  of  all  transfers,  liens,  or  encumbrances  were  not 
required.  An  officer  variously  called  a  county  recorder, 
recorder  of  deeds,  register  of  deeds,  or  recording  clerk, 
whose  duty  it  is  to  make  permanent  public  record  of  the 
documents  affecting  the  title  of  land,  is  regularly  elected 
or  appointed  in  each  county.  It  is  assumed  that  any 


94  AUDITING   (61-70)— Legal  Aspects 

prospective  purchaser  of  land  will  satisfy  himself  as  to 
the  title  of  the  land,  by  referring  to  the  public  records, 
where  conflicting  claims  upon  the  property,  if  there  are 
any  such,  should  be  recorded.  Purchasers  of  land  do 
not  often  do  this  personally,  but  secure  an  Abstract  of 
Title,  which  is  a  carefully  prepared  explanation  or  digest 
of  all  documents  that  affect  the  title  of  the  given  prop- 
erty. This  abstract  is  based  on  the  county  records.  Any 
doubtful  question  about  title  to  property  should  be  sub- 
mitted to  a  real  estate  lawyer. 

The  purchaser,  on  receiving  a  deed  to  the  property, 
should  send  the  deed  to  the  county  recording  office  for 
record  at  once.  To  do  so,  is  highly  important  since 
this  record  alone  conveys  notice  to  the  public  of  the 
purchaser's  title.  He  will  thus  have  priority  of  record 
as  protection  against  other  claimants  who  might,  through 
the  errors  or  double  dealing  on  the  part  of  the  seller, 
have  mortgages,  or  other  liens  of  which  the  purchaser 
had  no  notice,  and  which  might  be  recorded  by  these 
claimants. 

Some  of  the  liens  which  should  be  looked  for  are  the 
following:  Mortgages;  rights  of  heirs  of  a  former  de- 
ceased owner;  rights  of  spouse  or  others  through  imper- 
fect previous  conveyance  or  disability  of  the  conveyor; 
unpaid  taxes;  mechanics'  liens  for  unpaid  labor  or  ma- 
terial in  the  property;  judgments  against  a  former 
owner ;  a  lease  of  the  property  to  a  tenant. 

On  the  other  hand,  persons  interested  in  any  of  the 
above  or  other  liens  against  property,  should  have  the 
same  recorded,  in  accordance  with  the  state  laws,  in 
order  to  secure  their  priority  of  record,  which  is  a  notice 
to  subsequent  parties  of  their  interest  in  the  property. 

After  being  recorded,  the  deed  should  be  preserved 
by  the  owner  of  the  land. 

68  E.  Commercial  Papers  consist  of  drafts  and 
checks,  acceptances,  promissory  notes,  and  bonds.  They 
are  demands  upon  a  person  (the  drawee)  or  promises 


AUDITING   (61-70)— Legal  Aspects  95 

made  by  a  person   (the  maker)   to  pay  to  the  order  of 
another  person,  a  sum  of  money  at  a  given  time. 

(1).  Negotiability  is  the  distinguishing  mark  of 
commercial  paper.  By  this  is  meant  that  the  given  paper 
can  be  passed  in  the  course  of  business  from  one  holder 
to  another,  and  that  any  bona  fide  holder  or  authorized 
payee,  has  the  legal  right  to  collect  the  paper  in  his  own 
name,  regardless  of  equities  existing  between  the  original 
parties  to  the  instrument.  Negotiable  paper  passes  cur- 
rent as  money  in  the  great  majority  of  business  settle- 
ments. 

(2).  The  draft  is  a  written  form,  used  by  a  first  per- 
son (the  drawer),  in  directing  a  second  person  (the 
drawee),  to  pay  a  given  sum  of  money  to  a  third  person 
(the  payee),  or  to  some  one  (the  endorsee),  whom  the 
payee  directs.  Foreign  drafts  are  called  bills  of 
exchange. 

Suppose  that  two  men  named,  respectively,  Mr.  Give 
and  Mr.  Take,  live  in  your  home  city ;  and  that  Mr.  Owe, 
who  is  indebted  to  Mr.  Give,  lives  in  New  York  City. 
Also,  Mr.  Give  owes  Mr.  Take,  and  the  latter,  who  is 
about  to  go  to  New  York  City,  accepts  from  Mr.  Give  a 
letter  directing  Mr.  Owe  to  pay  Mr.  Take  a  sum  of 
money.  On  arrival,  Mr.  Take  hands  the  letter  to  Mr.  Owe 
and  receives  the  money.  Such  a  letter  would  be  called  an 
order.  But  if  the  letter  were  changed  so  as  uncondition- 
ally to  direct  Mr.  Owe  to  pay  the  money  to  the  order 
of  Mr.  Take,  then  Mr.  Take  would  not  need  to  present  it 
personally  to  Mr.  Owe,  but,  by  endorsement,  could  pass 
the  paper  to  any  other  person,  whom  we  call  Mr.  Collect. 
Mr.  Collect  could  take  the  paper  to  Mr.  Owe  and  secure 
the  money  as  well  as  Mr.  Take  could.  Mr.  Collect,  if  he 
chose,  could  endorse  the  paper  to  another  person,  and  this 
person  to  still  another,  until  finally  the  last  endorsee 
could  present  it  to  Mr.  Owe  for  payment.  Papers  in 
form  to  be  handled  in  this  way  are  called  drafts. 

(3)  All  banks  have  money  on  deposit  in  other 
banks,  located  at  a  distance  in  trade  centers,  upon  whom 


96  AUDITING  (61-70)— Legal  Aspects 

they  draw  bank  drafts  for  sale  to  customers  who  wish  to 
transmit  money  safely  through  the  mail.  A  properly  en- 
dorsed draft  is  collectible  by  only  one  person — the  payee 
—or  by  an  endorsee.  A  lost  or  stolen  bank  draft  is  worth- 
less to  the  finder  or  thief,  unless  he  successfully  forges  the 
payee's  endorsement. 

(4)  Merchants  draw  drafts,  which  they  call  bills  of 
exchange,  on  distant  merchants  in  settlement  of  the  bal- 
ances due  between  them.     Such  drafts  when  payable  a 
certain  time  after  presentation,  are  called  time  paper. 

The  drawee  of  a  time  bill  of  exchange,  by  his  "ac- 
ceptance" promises  to  pay  it  at  the  expiration  of  the 
specified  time.  An  acceptance  usually  consists  in  the 
drawee's  writing  across  the  face  the  word  "Accepted," 
"0.  K.."  or  some  similar  form  of  assent,  followed  by  his 
signature.  An  accepted  bill  of  exchange,  or  draft  pay- 
able, is  equivalent  to  a  note  payable,  and  is  entered,  in  the 
books,  in  the  accounts  of  Bills  Payable  or  Notes  Payable. 

(5)  Slow  customers  are  reminded  of  their  indebted- 
ness by  collection  drafts  sent  through  banks  for  presenta- 
tion to  the  drawees.      Collection    drafts    are    little  more 
than  duns,  and  are  of  no  value  until  paid. 

(6)  A  bank  check  is  essentially  a  draft  drawn  by  a 
depositor  on  the  bank  that  holds  his  deposit.    Checks  are 
negotiable,  as  ordinarily  made.    Payment  by  check  is  the 
safest  way  to  disburse  money,  as  the  payer  thus  has  a  rec- 
ord of  each    payment    on    his  check  stub.     Also,  the  en- 
dorsement on  the  back  of  the  check  operates  as  a  receipt 
from  this  payee.     Banks  discourage   the   circulation  of 
checks  beyond  the  locality  where  issued. 

Checks  may  be  presented  to  the  drawee  bank  for 
certification,  which  is  a  writing  across  the  face  obligat- 
ing the  bank  to  pay  the  check  when  presented.  The 
word  "certified,"  with  the  signature  of  a  bank  officer 
is  sufficient.  A  certified  check  is  an  obligation  of  the 
bank  in  all  legal  essentials  like  an  accepted  bill  of  ex- 
change. 

(7).     Bonds  issued  by  corporations,  municipalities, 


AUDITING  (61-70)— Legal  Aspects  97 

and  individuals,  are  usually  drawn  in  negotiable  form, 
like  notes,  and  can  be  transferred  by  endorsement. 

All  commercial  paper  received  as  cash,  should  be 
collected  or  deposited  promptly,  checks  especially,  within 
a  day  after  receipt,  as  there  are  contingencies  that  might 
stop  payment. 

68  F.  Agents  are  persons  authorized  to  act  and  who 
do  act  for  others.  General  agents  represent  the  princi- 
pals in  all  business  covered  by  the  agency ;  special  agents 
have  authority  extending  to  special  acts  only.  An  agent 
may  receive  " power  of  attorney"  from  his  principal, 
thus  authorizing  him  to  attach  his  principal's  name  and 
seal  to  contracts.  Agents  intrusted  by  a  principal  with 
merchandise,  ordinarily  have  a  lien  against  the  goods  in 
their  hands,  to  secure  payment  for  services. 

Salesmen,  collectors,  commission  merchants,  auc- 
tioneers, attorneys-at-law,  officers  of  corporations,  mem- 
bers of  firms,  and  many  other  agents,  have  their  duties 
and  obligations  pretty  clearly  defined  by  law  and  custom. 
However,  it  is  possible  for  almost  any  agent  to  exceed 
his  authority,  and  to  involve  his  principal  in  obligations 
not  intended  by  either  of  them.  In  such  cases  the  prin- 
cipal might,  to  his  damage,  be  bound  to  third  parties  and 
possibly  be  unable  to  recover  from  the  agent  who  had  ex- 
ceeded his  authority. 

When  an  agent  is  appointed  for  a  special  purpose, 
the  contract  should  be  in  writing,  and  should  clearly  ex- 
plain the  agent's  duties. 

68  G.  Partnership  is  a  relation  between  two  or  more 
persons  who  unite  capital,  labor  and  management  for 
joint  profit. 

The  relations  of  the  partners  should  be  written  in 
an  agreement,  clearly  stating,  (1)  the  names  of  the  part- 
ners and  of  the  firm;  (2)  the  nature  of  the  business;  (3) 
the  time  of  the  partnership ;  (4)  the  investments  of  the 
partners;  (5)  the  salary  allowed  partners  for  services; 

(6)  the  interest  allowed  partners  for  capital  invested; 

(7)  the  proportion  of  net  profit  or  loss  assigned  to  each 


98  AUDITING   (61-70)— Legal  Aspects 

partner;  (8)  a  limitation  preventing  any  partner  from 
involving  the  firm  in  unnecessary  obligations;  (9)  a  pro- 
vision for  the  continuation  or  the  dissolution  of  the 
partnership. 

Ordinarily  each  partner,  as  agent  of  the  firm,  has 
power  to  bind  the  others  in  the  firm  contracts.  Each  is 
personally  liable  for  the  entire  indebtedness.  A  close 
relation  of  trust  exists  between  the  partners,  so  that  it 
is  unwise  for  anyone  to  join  business  interests  with  per- 
sons in  whom  he  has  not  entire  confidence,  or  who  are 
not  financially  responsible.  Every  partnership  should 
be  qualified  in  a  definite  written  agreement. 

A  partnership  may  be  dissolved  at  any  time  by  con- 
sent of  the  partners,  or  by  expiration  of  the  time  named 
in  the  agreement.  One  partner  may  withdraw  without 
consent  of  others,  before  the  time  set  in  the  contract, 
and  this  will  effect  a  dissolution  of  the  partnership,  but 
the  partner  who  does  this,  becomes  liable  for  damage  to 
the  other  partners  for  doing  so.  The  death  or  bank- 
ruptcy of  a  partner  dissolves  the  firm.  A  partner  cannot, 
by  withdrawal,  escape  liability  for  existing  debts  of  the 
firm  to  third  parties,  even  though  these  may  be  assumed 
by  the  remaining  members  of  the  firm.  The  estate  of  a 
deceased  partner  is  also  liable  for  the  firm  debts  at  the 
time  of  his  death. 

An  auditor  frequently  discovers  that  one  partner  has 
unfair  advantages  over  another  which  are  difficult  to 
adjust.  In  a  retail  store,  it  not  infrequently  occurs 
that  one  partner  takes  out  for  his  own  use,  goods  greatly 
in  excess  of  the  other's  drawings.  He  may  also  un- 
wisely create  debts  which  the  firm  must  pay,  and,  in 
other  improper  ways,  involve  his  partner's  capital.  An 
honest,  capable  person  is  frequently  at  the  mercy  of  a 
dishonest  partner,  and  cannot  escape  loss,  so  long  as  the 
partnership  continues.  Some  of  the  heaviest  business 
losses  are  traceable  to  an  unwise  choice  of  partners. 

68  H.  A  Corporation  enables  several  persons  to  com- 
bine their  capital  and  services  under  one  maim^t -UK -nt. 


AUDITING   (61-70)— Legal  Aspects  99 

while  avoiding  some  of  the  disadvantages  of  the  partner- 
ship relation. 

The  ordinary  private  corporation  is  formed  by  virtue 
of  general  acts  of  legislation,  which  specify  the  steps  to 
be  taken  by  persons  intending  to  incorporate,  and  which 
authorize  the  issuance,  to  the  incorporators,  of  a  certifi- 
cate, or  license,  which  evidences  their  compliance  with 
the  law.  Their  compliance  with  the  legal  provisions  en- 
ables the  corporators  to  act  through  the  corporation  in 
the  following  ways:  (1)  the  capital  stock  (divided  into 
shares)  may  be  owned  by  stockholders,  who  can  dispose 
of  their  interests  in  the  company  to  other  persons,  and 
withdraw  entirely  from  it,  without  affecting  the  contin- 
uance of  the  corporate  organization;  (2)  the  corporation 
may  appoint,  or  remove  officers  or  agents  who  conduct  its 
business  and  make  contracts;  (3)  the  corporation  may 
use  a  corporate  seal  and  may  acquire  and  dispose  of  real 
property  in  its  own  name ;  (4)  the  corporation  may  incur 
debts  for  which  the  stockholders  are  not  individually 
liable  beyond  the  amount  of  their  stock  in  the  company, 
or  such  additional  amounts  as  may  be  specified  by  the 
laws  relating  to  specified  kinds  of  corporations;  (5)  a 
corporation  may  perform  all  the  ordinary  business  trans- 
actions that  an  individual  may,  provided  they  are  within 
the  purposes  for  which  the  corporation  was  formed. 

Specific  information  about  the  powers,  rights,  and 
obligations,  must  be  looked  for  in  the  laws  of  the  state 
where  incorporated. 

When  the  authorized  number  of  persons  desire  to 
incorporate,  they  draw  up  articles  of  incorporation  or  a 
certificate  of  incorporation.  A  blank  incorporation  form, 
to  be  filled  out  by  the  incorporators,  can  usually  be 
secured  from  the  Secretary  of  State  in  the  state  where 
the  corporation  is  organized.  These  articles  give  the 
name  of  the  corporation,  purposes,  amount  of  capital 
stock,  number  of  shares,  principal  place  of  business,  dura- 
tion of  corporation,  number,  names  and  addresses  of  the 
incorporating  stockholders,  the  number  of  shares  held  by 
each,  and  other  provisions. 


100  AUDITING   (61-70)— Legal  Aspects 

A  subscription  list  is  signed  by  persons  who  organize 
the  corporation,  each  agreeing  to  take  the  number  of 
shares  specified.  This  list  is  a  contract  upon  which  pay- 
ment may  be  legally  enforced,  should  any  subscriber 
refuse  to  pay  his  pro  rata.  The  payments  made  by  the 
subscribers  constitute  the  capital  of  the  corporation. 

"When  the  stock  is  paid  for,  the  officers  issue  stock 
certificates  to  the  subscribers,  who  then  become  stock- 
holders. 

The  incorporating  stockholders  elect  from  their  num- 
ber, certain  members  to  be  directors.  The  directors  in 
turn,  elect  the  officers.  The  officers  usually  include  presi- 
dent, vice-president,  secretary  and  treasurer.  The 
treasurer  usually  has  in  charge  the  bookkeeping  records 
of  the  business. 

68 1.  Bankruptcy  is  the  legal  condition  of  an  in- 
solvent person  whose  property  has  been  ordered  by  court 
decree  to  be  placed  in  the  hands  of  a  receiver  for  the 
winding  up  of  his  affairs.  The  court  order  may  be  made 
on  petition  of  creditors,  who  are  aware  of  the  firm's 
insolvency,  or  believe  that  deception  is  being  practiced 
vpon  th em,  or  have  reason  to  think  other  creditors  have 
undue  preference ;  and  bring  the  action  in  bankruptcy  as 
a.  means  of  securing  their  share  of  the  assets,  rather  than 
risk  further  delay.  It  may  be  made  on  petition  of  the 
owner  -himself,  who  goes  into  bankruptcy  in  the  desire 
to  turn  over  his  property  to  creditors,  and,  in  so  doing, 
to  escape  further  liability  through  the  provisions  of  the 
law. 

One  national  bankruptcy  law  provides  relief  in  this 
matter,  and  specifies  that  any  person,  except  municipal, 
railroad,  insurance,  or  banking  corporations,  may  secure 
the  benefits  of  this  act  by  becoming  a  voluntary  bank- 
rupt. 

The  bankrupt  is  entitled  to  the  benefit  of  state  ex- 
tmption  laws,  which  permit  him  to  rrtnin  crrtjiin  prop- 
erty for  his  personal  use — the  amounts  he  may  retain 
varying  in  different  states. 


AUDITING   (61-70)— Legal  Aspects  101 

68  J.  Executors  and  Administrators  are  officers  ap- 
pointed by  a  court  to  close  up  the  estates  of  deceased 
persons.  The  person  appointed  is  called  an  executor 
when  he  is  named  by  the  deceased  in  his  will,  and  he 
receives  his  court  appointment  from  this  fact.  When  no 
executor  is  named  by  the  deceased,  the  officer  appointed 
is  called  an  administrator.  Among  the  duties  of  an  ex- 
ecutor or  administrator  are  to  inventory  and  secure  ap- 
praisal of  the  personal  assets  belonging  to  the  estate,  to 
pay  the  debts  of  the  estate  out  of  the  assets,  to  distribute 
the  estate,  and  make  an  accounting  to  the  court.  The 
executor  or  administrator  usually  performs  these  duties 
under  legal  advice.  The  administrator  should  open  a 
separate  set  of  books  for  the  estate,  and  a  bank  account 
of  the  moneys  should  be  kept  as  a  separate  fund.  The 
compensation  of  executors  and  administrators  for  their 
services  is  usually  fixed  by  a  statute  in  the  several  states, 
and  is  a  preferred  expense. 

68  K.  Income  Tax.  The  federal  laws  provide  for 
an  annual  income  tax  to  be  paid  by  all  persons  who  re- 
ceive income  in  the  United  States  in  excess  of  the  spe- 
cific exemption,  consisting  of  $3,000  for  individuals,  or 
$4,000  if  it  is  the  combined  income  of  husband  and  wife. 

At  this  writing  (November,  1913)  many  features 
about  this  law  are  subject  to  dispute,  and  must  be  settled 
in  course  of  time  by  rulings  from  the  Treasury  Depart- 
ment of  the  United  States  and  by  the  courts.  The  bearing 
it  has  on  accountancy  and  on  the  duties  of  an  auditor, 
may  be  gathered  in  a  measure  from  the  following  brief 
summary  derived  from  a  synopsis  written  by  Judge  Hull, 
who  prepared  the  income  tax  provision  of  the  law  (see 
Congressional  Record,  Vol.  50,  p.  6330). 

The  Normal  Tax  of  1  per  cent  on  annual  income  ap- 
plies to  individuals  within  the  provisions,  and  to  all  cor- 
porations conducted  for  gain.  The  Additional  Tax  ap- 
plies to  individuals  only,  and  is  added  to  the  normal  tax 
as  follows : 

One  per  cent  on  incomes  from  $20,000  to  $50,000;  2 


102  AUDITING   (61-70)— Legal  Aspects 

per  cent,  .from  $50,000  to  $75,000;  3  per  cent,  from 
$75,000  to  $150,000 ;  4  per  cent,  from  $150,000  to  $250,000 : 
5  per  cent,  from  $250,000  to  $500,000 ;  6  per  cent,  over 
$500,000. 

Taxable  Income  is  net  profit  derived  from  invest- 
ments and  business  operations,  or  it  may  be  derived  from 
personal  or  professional  service,  business,  trade,  com- 
merce, dealings  or  lawful  transactions,  interest,  rents, 
dividends,  and  other  receipts  not  brought  about  by  the 
conversion  of  other  kinds  of  capital  into  money.  The 
gross  incomes,  revenues,  or  earnings  of  an  individual  are 
subject,  besides  specific  exemption,  to  the  following 
named  deductions  before  arriving  at  the  amount  return- 
able for  normal  income  tax: 

1.  Necessary  business  expenses  (living  expenses  not 
included). 

2.  Interest  accrued  and  paid  within  the  year  on  in- 
debtedness. 

3.  Taxes,  (except  those  assessed  for  local  benefits). 

4.  Losses  in  business   (by  fire,  storm  or  shipwreck 
not  compensated  by  insurance). 

5.  Bad  debts  charged  off. 

6.  Depreciation  charged  off  in  reasonable  amount. 

7.  Interest  on  obligations  of  the  United  States  or 
any  political  subdivisions  thereof. 

8.  Dividends    from    companies    that    have    already 
been  taxed  for  income. 

9.  Other  income  that  has  been  taxed  at  the  source. 
(Nos.  8  and  9  would  be  included  for  additional  tax). 
An  individual  is  subject  to  normal  income  tax  on  his 

profits,  after  deduction  of  the  specific  exemption,  and  the 
above  nine  deductions,  or  to  additional  tax  on  the  same  in 
excess  of  $20,000,  except  that  Nos.  8  and  9  are  not  de- 
ducted in  finding  the  additional  tax. 

Partnerships  are  recognized  in  law  only  through  the 
individual  members,  who  are  subject  to  tax  through  their 
individual  shares  in  the  profits. 


AUDITING  (61-70)— Legal  Aspects  103 

Corporations  and  Joint  Stock  Companies  are  subject 
to  normal  tax  on  all  net  profits.  Additional  tax  does  not 
apply  to  them  because  such  tax  is  returnable  personally 
by  the  individuals  who  receive  dividends. 

In  arriving  at  the  net  profits  of  a  corporation,  not 
only  dividends  declared,  but  profits  carried  to  surplus,  or 
any  sorts  of  secret  reserves  set  up  to  obscure  profits, 
would  come  under  the  head  of  taxable  income.  This 
should  not  be  construed  to  include  as  taxable,  any  reason- 
able or  ordinary  surplus  or  reserve  justified  by  the  con- 
ditions of  the  business.  The  Treasury  Department  of  the 
United  States  provides  a  form  of  profit  and  loss  state- 
ment to  be  filled  by  corporations  in  making  their  returns. 
On  this  statement  space  is  provided  for  the  following 
allowable  deductions  from  earnings  for  the  purpose  of 
arriving  at  taxable  income : 

1.  Total  ordinary  expenses  paid  in  maintenance  and 
operation. 

2.  Rentals  paid  for  use  of  property. 

3.  Losses  sustained  not  compensated  by  insurance. 

4.  Reasonable  depreciation  in  property. 

5.  Interest  accrued  and  paid  within  the  year  on  in- 
debtedness to  an  amount  not  exceeding  one-half 
the    sum    of   the    indebtedness  and  the  paid  up 
capital  stock. 

6.  Taxes    imposed    under    authority  of  the  United 
States;  and  separately,  taxes  imposed  by  foreign 
governments. 

Returns.  The  law  provides  that  individuals  shall 
make  a  true  and  accurate  return  of  all  net  incomes  of 
$3,000  or  more  to  the  collector  of  internal  revenue  in  his 
district,  on  March  1,  1914,  and  on  or  before  March  1  each 
year  thereafter,  but  no  return  of  income  not  exceeding 
$3,000  is  required. 

A  suitable  blank  form  for  this  purpose  is  provided 
by  the  collector  of  internal  revenue  for  the  district.  They 
shall  be  notified  by  the  collector  of  the  amount  taxed  by 
June  1  following,  and  shall  pay  the  same  by  June  30. 


104  AUDITING   (61-70)— Legal  Aspects 

On  income  tax  unpaid  after  June  30,  and  after  ten 
days'  demand  by  the  collector,  5  per  cent  penalty  shall 
be  added,  and  interest  at  1  per  cent  per  month  additional 
until  paid. 

Note  that  an  individual  is  entitled  to  deduct  from 
the  amount  of  taxable  income  any  income  from  which  the 
tax  has  already  been  collected  at  the  source  as  explained 
in  the  following: 

Collection  at  the  Source.  Persons,  firms  and  com- 
panies, including  lessees,  mortgagors,  trustees,  executors, 
employers,  having  control  of  the  payment  of  interest, 
rent,  salaries,  wages,  premiums,  annuities,  compensation, 
remuneration,  emolument,  or  other  fixed  or  determinable 
annual  or  periodic  gains,  profits,  or  income  of  another 
person,  exceeding  $3,000  for  any  taxable  year,  are  author- 
ized and  directed  to  deduct  and  withhold  the  normal  tax 
thereon  and  to  pay  it  to  the  United  States  official  author- 
ized to  receive  it. 

It  thus  appears  that  the  purpose  of  the  law  is  to  col- 
lect as  much  as  possible  of  the  income  tax  at  the  source, 
rather  than  from  the  individual's  returns. 

Accounts.  A  business  ledger,  kept  as  outlined  in 
Prin.  72  B,  or  more  fully  in  Prin.  51  to  60,  will  furnish  all 
data  for  full  returns  within  the  requirements  of  the  law. 
If  such  a  ledger  is  not  kept,  an  auditor  will  find  some 
trouble  in  preparing  the  necessary  returns.  Care  should 
be  taken  to  make  all  allowable  deductions  in  arriving  at 
net  income. 

In  addition  to  that,  persons  required  to  withhold  in- 
come tax  at  the  source,  should  keep  an  auxiliary  record 
of  the  above  enumerated  payments  passing  through  their 
hands  to  the  persons  liable  for  payment  at  the  source. 

69.  Single  Entry  Bookkeeping  is  .-my  systom  of 
bookkeeping  which  lacks  the  completeness  of  double 
entry  in  the  matter  of  equal  debits  and  credits.  It  is 
assumed  that  a  single  entry  bookkeeper  makes  some 
records  for  all  important  transactions,  and  that  these 
records  are  so  kept  as  to  show,  in  a  general  way,  all 


AUDITING   (61-70)— Single  Entry  105 

cash  receipts  and  payments,  and  the  amount  of  the  cash 
balance.  The  records  must  necessarily  extend,  also,  to 
accounts  showing  collections  to  be  made  from  customers, 
and  accounts  showing  amounts  owed  to  creditors.  To 
keep  accounts  of  cash  on  hand,  cash  to  be  collected,  and 
cash  to  be  paid,  is  all  that  is  usually  attempted  in  single 
entry  bookkeeping. 

It  is  easier  to  keep  such  single  entry  books  than  to 
keep  books  by  double  entry,  because  no  posting  is  re- 
quired for  any  cash  receipts  or  payments,  except  those 
that  pertain  to  customers'  or  creditors'  accounts.  Ac- 
counts of  property  and  nominal  accounts  are  ignored. 
There  is  no  time  spent  in  locating  errors  outside  of  the 
cash  balance,  because  there  is  nothing  in  the  system  to 
disclose  the  presence  of  errors;  no  time  is  spent  over  a 
trial  balance  because,  as  there  is  no  attempt  at  equality 
of  debits  and  credits,  there  can  be  no  trial  balance. 

There  are  single  entry  sets  of  books,  however,  in 
which  accounts  of  property,  sales,  and  various  expenses 
are  kept.  Some  large  mercantile  concerns  keep,  by 
single  entry,  approximately  all  the  accounts  found  in 
some  double  entry  sets  of  books.  Various  auditing  proofs 
may  give  the  same  sense  of  accuracy  in  single  entry 
books  that  a  trial  balance  does  in  double  entry.  But 
when  single  entry  books  are  so  highly  developed  as  to 
furnish  proof  of  accuracy,  or  keep  accounts  of  property 
and  classified  expenses,  they  entail  more  labor,  with  less 
complete  adjustment  of  accounts,  than  would  a  double 
entry  system,  developed  to  the  same  extent. 

It  is  plain,  however,  that  the  original  entries  in 
single  entry  books  can  be  posted  to  whatever  accounts 
the  bookkeeper  desires,  until  a  complete  double  entry 
classification  is  reached. 

69  B.  The  books  ordinarily  referred  to  as  compris- 
ing a  single  entry  system,  consist  of,  (1)  a  day  book,  for 
charge  or  credit  entries;  (2)  a  cash  book  for  cash  re- 
ceipts and  payments;  (3)  a  ledger  containing  personal 
accounts.  Such  entries  as  are  not  posted  to  the  personal 


106  AUDITING   (61-70)— Single  Entry 

accounts,  remain  in  the  original  books,  as  memoranda. 
Any  auxiliary  book  may  be  added. 

69  C.  A  common  form  of  single  entry  used  by  shop- 
keepers, consists  of  a  summary  book,  into  which  are 
transferred,  daily,  the  total  receipts  and  payments  of 
cash,  the  total  charge  sales,  and  the  payments  thereon, 
and  sundry  payments,  all  taken  from  the  record  made 
in  a  cash  register.  These  are  recorded  in  the  cash  regis- 
ter automatically,  in  columns  showing  receipts  from 
cash  sales  separate  from  receipts  from  customers  on 
account,  and  payments  from  cash  purchases,  separate 
from  payments  on  account.  A  fifth  column  shows  the 
amount  of  sales  on  account.  A  separate  bill  and  charge 
book  is  kept  for  each  credit  customer.  This  is  a  book 
containing  a  number  of  duplicate  sale  sheets,  for  the 
items  sold.  An  original  sheet  is  passed  to  the  customer  at 
each  sale,  and  the  duplicate  retained  in  the  book.  The 
total  of  the  customer's  account  is  forwarded  on  the 
duplicates  from  page  to  page. 

The  bills  owed  by  the  shopkeeper  are  kept  in  a 
drawer,  and  taken  out  as  paid. 

Such  a  system  answers  the  purpose  of  keeping  a 
watch  on  cash  and  customers'  accounts.  The  errors  in 
the  customers'  accounts,  however,  which  are  likely  to  be 
numerous,  are  undiscovered  unless  reported  by  the  cus- 
tomer. 

69  D.  When  a  single  entry  set  of  books  is  used,  the 
net  profit  or  loss  for  a  fiscal  period  is  usually  found  by 
comparison  of  the  net  worth  at  the  beginning  with  that 
at  the  close  of  the  period,  as  exhibited  in  financial  state- 
ments. 

It  must  be  remembered,  however,  that  there  are  ordi- 
narily no  accounts  from  which  the  financial  statement 
is  to  be  derived,  except  the  cash  and  personal  accounts; 
all  other  items  are  to  be  entered  in  the  statement  from 
inventory,  or  from  such  papers  and  documents  as  may 
be  found.  Such  statements  as  Nos.  1  and  2  (Book  of 
Forms)  may  be  used. 


AUDITING   (61-70)— S.  E.  Changed  to  D.  E.  107 

69  E.  Single  entry  bookkeeping  always  has  been, 
and  probably  always  will  be,  used  by  small  retail  con- 
cerns. It  is  defective  in  the  kind  of  account  analysis 
that  enables  a  proprietor  to  know  the  operation  and  re- 
sults of  the  business  in  detail,  and  judge  the  future  by 
the  record  of  the  past.  It  is  pre-eminently  the  system 
for  persons  whose  entire  business  expansion  is  to  come 
through  their  own  personal  efforts. 

69  F.  To  Change  Single  Entry  to  Double  Entry,  is 
a  simple  process.  After  making  a  financial  statement, 
journalize  it.  (Form  No.  13  A  affords  a  good  model.) 
If  it  is  desired  to  retain  the  old  ledger,  check  such  ac- 
counts in  the  journal  entry  as  already  appear  in  the 
ledger,  open  new  ledger  accounts  for  the  remainder,  and 
post  them.  After  the  opening  entry  is  posted,  a  trial 
balance  should  be  taken. 

The  books  of  original  entry  may  be  modified  to  suit 
the  business. 

70.  The  Auditor's  Report.  Large  business  houses 
regularly  employ  auditors  to  work  continuously  in  veri- 
fying the  accounts  of  the  different  departments  of  branch 
houses,  of  agencies,  and  of  the  officials.  The  reports  of 
such  auditors  are  entered  in  suitable  printed  blanks,  and 
are  made  with  a  view  to  affording  a  collateral  check  on 
the  books.  The  form  of  the  reports  is  the  outcome  of  the 
skill  and  insight  of  the  one  who  devised  it,  and  its  value 
depends  on  its  applicability  to  the  business  in  which  it 
is  used. 

Auditors  are  also  regularly  retained  by  business 
houses  to  review  their  books  annually,  or  oftener,  at 
regular  intervals.  When  the  books  are  regularly  audited, 
the  auditor's  first  report  covers  the  entire  matters  under 
consideration  much  more  exhaustively  and  minutely  than 
subsequent  reports.  The  latter  are,  in  a  measure,  based 
upon  the  first. 

The  report  of  a  complete  audit  includes  the  financial 
and  business  statements,  divided  with  such  minuteness  as 
the  case  demands.  The  items  in  these  statements  are 


108  BOOKKEEPING— Original  Entries   ( 71-71  H) 

further  explained  by  schedules  and  analysis  sheets,  at- 
tached to  the  statement.  The  report  also  includes  the 
auditor's  letter,  which  reviews  the  main  points  of  in- 
quiry, and  specifies  particularly,  any  entries  in  the  books 
not  supported  by  vouchers,  any  irregularities  in  the  books, 
any  defects  in  title  to  the  property,  or  negligence  in  the 
care  of  property  or  claims,  and  any  specific  recommenda- 
tions tending  to  improve  the  methods  of  the  business  or 
the  bookkeeping  system. 

71.  Original  Entries  are  those  made  at  the  time  of 
the  transaction,  and  comprise  the  basis  for  the  transferred 
entries,  which  later  appear  in  the  ledger  accounts. 

There  are  two  important  phases  of  the  original  en- 
try: (1)  the  record  of  the  facts  about  the  transaction; 
(2)  the  record  of  the  accounts  affected  by  the  trans- 
action. The  record  of  the  facts  is  naturally  first.  It 
should  be  a  complete  record,  giving  the  essentials  in  such 
a  way  as  to  make  subsequent  explanation  unnecessary. 
When  the  facts  are  recorded,  the  next  step  is  to  determine 
and  enter,  for  the  purpose  of  posting,  the  titles  of  the 
accounts  affected  by  the  transaction. 

In  a  business  having  numerous  account  subdivisions, 
the  account  to  charge  or  to  credit  in  a  given  transaction, 
may  be  in  doubt,  and  often  the  matter  cannot  be  decided 
at  the  moment.  With  a  correct  original  record  of  the 
facts,  the  posting  titles  can  be  entered  at  any  time  before 
the  posting  is  done. 

For  many  years,  the  Day  Book  was  used  to  coiit;iin 
all  records  of  the  facts  about  transactions,  and  the  Jour- 
nal was  used  to  show  the  posting  titles  and  amounts  de- 
rived from  these  facts.  These  two  books,  in  mon-  reeeni 
bookkeeping,  have  been  combined  into  one  book,  retain- 
ing the  name  Journal.  Yet,  this  latter  book  is  now  used 
to  contain  all  original  entries  of  a  business,  only  un.lt  i- 
exceptional  business  conditions.  In  the  average  office,  ii 
contains  such  entries  as  other  books  of  orijriiml  miry 
ejiimot  proprrlv  explain  ;md  classify. 

However,  it  is  possible  to  make  every  entry  in  jour 


BOOKKEEPING— Original  Entries   ( 71-71  H)  109 

nal  form,  and  the  journal  form  of  an  entry  is  the  one 
used  in  discussing  the  account  analysis  of  any 
transaction. 

71  B.  At  the  present  time,  the  great  mass  of  book 
records  are  most  economically  made  in  a  number  of 
books,  intermediate  between  journal  and  ledger,  and  con- 
taining some  of  the  elements  of  both. 

The  first  of  these  is  the  Cash  Book,  which  contains 
original  entries  of  cash  receipts  and  payments,  in  more 
compact  order  than  though  they  were  spread  upon  a 
journal,  while,  at  the  same  time,  it  is  so  arranged  as  to 
exhibit  the  cash  balance  without  posting  to  the  ledger. 

The  Merchandise  Sold  Book  is  probably  next  in  im- 
portance among  the  books  intermediate  in  function  be- 
tween journal  and  ledger.  This  book  gives  a  consecutive 
record  of  selling  transactions,  while  it  may  be  totaled  to 
find  the  entire  merchandise  sold  without  posting,  item  by 
item,  to  the  credit  of  a  Merchandise  Sold  account  in  the 
ledger. 

The  Merchandise  Bought  Book,  the  Bill  Book,  the 
Inventory  Book,  the  Voucher  Register,  the  Draft  Regis- 
ter, the  Account  Sales  Register,  and  many  other  books 
applying  especially  to  certain  lines  of  business,  take  the 
place  of  the  journal,  for  original  entries,  while  they  re- 
lieve the  ledger  of  a  more  or  less  complete  classified 
record  of  results. 

The  original  entry,  then,  is  the  first  record  of  a 
transaction  in  the  journal,  or  other  book  designed  for 
first  entries  of  a  given  class.  The  original  entry  should 
either  give  all  essential  facts  of  the  transaction,  or  else 
refer  to  accessible  vouchers  giving  the  essential  facts. 

71  C.  Reliable  Original  Entries.  Bookkeeping  rec- 
ords serve  to  explain  the  financial  obligations  between  a 
given  business  concern  and  other  persons  or  concerns, 
and  between  the  members  of  the  same  concern,  as  well  as 
to  explain  the  business  operations. 

The  adjustment  of  differences  between  a  concern 
and  outside  people,  or  between  its  several  members,  may 


110  BOOKKEEPING— Original  Entries  ( 71-71  H) 

carry  with  it  disputes  that  must  be  settled  in  a  court  of 
law.  The  amounts  of  such  settlements  depend  largely  on 
the  records  kept  by  the  parties  to  the  dispute.  Account 
books  submitted  in  court  as  evidence  are,  as  a  rule,  ac- 
cepted if  they  comply  with  certain  established  rules  con- 
sidered essential  to  a  good  record.  If  they  do  not  com- 
ply with  those  rules,  the  books  may  be,  and  generally  are, 
given  no  consideration. 

A  good  set  of  books  will  be  found  to  show  evidence 
that  the  entries  are  complete  (71  D),  systematic  (TIE), 
reliable  (71 F),  and  promptly  recorded  (71  G). 

71  D.  Complete  Entries.  The  books  must  exhibit 
evidence  that  they  contain  all  the  records  of  a  given 
kind,  entered  according  to  a  defined  method  and  order. 
The  accuracy  of  other  records  in  the  same  books  not 
bearing  on  the  particular  matter  in  dispute,  has  a  bearing 
on  the  credibility  of  the  records  as  a  whole.  The  appear- 
ance of  any  slackness  in  making  records  in  any  part  of 
the  books,  tends  to  destroy  the  entire  record  as  evidence. 
Completeness  should  also  extend  to  a  statement  of  all 
the  essential  facts  in  every  entry  of  every  transaction. 
There  should  be  no  need  to  guess  at  the  meaning  of  an 
entry. 

71 E.  Systematic  Entries.  There  must  be  a  well 
defined  system  for  making  entries.  Varying  styles  of 
entry,  or  even  variation  in  the  style  of  writing,  tends 
to  cast  doubt  upon  a  set  of  books.  These  should  show 
that  all  entries  of  the  same  kind  follow  the  same  general 
routine  of  entry. 

Any  kind  of  books,  whether  bound,  or  loose-leaf,  or 
even  cards,  or  other  devices,  are  admissible,  provided 
they  show  all  reasonable  safeguards  against  inaccuracy. 

71  F.  Reliable  Entries.  A  set  of  books  shoufld 
show  the  straightforward,  open  record  of  one  who  is 
accustomed  to  write  facts  only,  and  to  write  them  just 
as  they  are.  Erasures  and  alterations  show  uncertainty. 
Any  mistakes  made  in  books  are  especially  damaging, 
if  they  are  either  wholly  or  partially  concealed. 


BOOKKEEPING— Original  Entries  ( 71-71  H)  111 

The  best  kept  books  may  show  some  errors,  but 
when  an  error  is  discovered  in  an  original  entry,  it 
should  be  plainly  marked,  "  error, "  and  the  correction 
for  it  should  be  also  plainly  marked  as  a  "  correction. " 

71 G.  Prompt  Enterics.  The  books  should  show 
that  all  records  of  transactions  were  made  while  the 
facts  were  fresh  in  mind.  It  should  be  kept  in  view 
that  the  purpose  of  books  is  to  carry  a  great  mass  of 
business  facts,  as  a  relief  to  the  mind.  To  carry  in 
memory,  any  longer  than  necessary,  things  that  require 
entry  in  the  books,  is  certainly  a  bad  method. 

71  H.  Ruling  in  Books  of  Original  Entry.  Books 
of  original  entry  are  ruled  in  a  variety  of  ways  to  suit 
different  kinds  of  entries.  The  ruling  should  afford 
convenient  spaces  for  the  following  elements  of  record, 
essential  to  every  entry : 

(1).     Date  of  the  transaction. 

(2).     Persons  with  whom  the  firm  has  transactions. 

(3).     Details  of  the  transaction. 

(4).  The  ledger  accounts  affected  by  the  trans- 
action. 

(5).     The  amounts. 

(6).    Posting  of  the  amounts  to  the  accounts. 

All  of  these  points  should  appear  in  every  original 
entry  that  may  involve  some  future  dispute. 

A  place  for  each  of  these  points  in  a  record  is  gen- 
erally provided,  in  books  of  original  entry,  by  vertical 
columns  separated  by  vertically  ruled  lines.  Thus  we 
have  the  "date  column/'  the  "explanation  column, " 
the  "title  column,"  the  "posting  column,"  the  "money 
columns,"  etc.  The  order  and  arrangement  of  these 
column's  are  open  to  the  preference  of  the  bookkeeper, 
and  are  determined  by  the  following  considerations: 

(1).     Convenience  in  making  original  entries. 

(2).     Convenience  in  posting. 

(3).     Convenience  for  future  reference. 

A  change  in  arrangement  of  columns  in  books  of 
original  entry  has  often  increased  the  efficiency  of  a  book- 


112         BOOKKEEPING— Charge  and  Credit  ( 71 1-71  R) 

keeper.  To  reduce  one's  daily  entry  and  posting  time 
by  one  hour,  should  increase  one's  earning  capacity  as 
a  bookkeeper  something  like  fourteen  per  cent. 

The  arrangement  of  the  books  of  original  entry 
should  be  studied  with  the  same  care  that  one  studies  the 
arrangement  of  the  ledger  account  classification. 

71 1.  Bear  in  mind  that  all  bookkeeping  entries  of 
transactions  are  made  to  show  the  effects  of  the  trans- 
actions upon  the  business  organization  for  which  the 
books  are  kept.  It  is  idle  for  a  bookkeeper  to  spend 
any  time  in  considering  the  effect  of  transactions  upon 
the  persons  with  whom  dealings  are  carried  on,  as  the 
viewpoint  of  firms  without  the  business  has  nothing  to 
do  with  the  results  sought  in  his  books. 

As  a  starting  point  for  the  mastery  of  the  theory  of 
charge  and  credit,  we  will  assume  that  the  typical  busi- 
ness involves  the  following  greater  processes:  (1)  the 
appropriation  of  cash  for  capital;  (2)  the  expenditure  of 
cash  for  business  necessities  with  a  view  to  producing 
a  commodity  or  service;  (3)  the  sale  of  the  commodity 
or  service,  so  produced,  for  cash. 

In  business,  the  processes  of  paying  for  business 
necessities  and  of  receiving  pay  for  product  or  service,  are 
continuous,  and  are  not  expected  to  come  to  a  full  con- 
clusion until  the  business  winds  up  its  affairs.  The  busi- 
ness manager,  however,  assumes  that  the  business  closes 
at  the  end  of  some  definite  period  of  time,  called  the 
fiscal  period,  usually  covering  one  year.  At  this  time 
he  expects  his  books  to  show  him,  (1)  the  kind  of  prop- 
erty remaining  in  the  business  and  its  net  value ;  (2)  the 
excess  of  his  sales  over  the  cost  of  selling  and  conducting 
the  business. 

To  make  such  a  final  showing,  every  transaction 
involving  a  change  of  values  must  be  recorded  when  it 
occurs,  and  entries  must  be  made  to  show  the  financial 
effect  of  the  given  transactions  in  the  accounts. 

From  the  viewpoint  of  the  reason  for  charge  and 
credit,  we  divide  accounts  into  six  kinds. 


BOOKKEEPING— Charge  and  Credit  (71 1-71  R)          113 

(1).     Accounts  of  cash  (71 J). 

(2).     Accounts  of  cash  to  be  collected   (71 K). 

(3).     Accounts  of  cash  to  be  paid   (71 L). 

(4).     Accounts  of  cost   (71  M  and  71.0). 

(5).     Accounts  of  yield  (71  N  and  71  0). 

(6).     Accounts  of  re-classification    (71 P). 

71  J.  Rule  for  Accounts  of  Cash.  Charge  the  Cash 
account  to  show  amounts  received;  credit,  to  show 
amounts  paid. 

Note. — This  account  may  be  kept  in  a  cash  book,  in 
a  ledger  account  of  cash,  or  in  a  bank  checking  account, 
in  a  memorandum  book,  or  on  a  ticket.  It  may  refer  to 
floating  cash  or  cash  held  in  a  special  fund. 

71  K.  Rule  for  Accounts  of  Cash  to  be  Collected. 
Charge  such  accounts  to  show  amounts  that  others  as- 
sume to  pay  into  the  business.  Credit  such  accounts  to 
show  amounts  we  collect  or  the  value  we  receive  to  apply 
on  such  charges. 

Note. — Included  in  above,  are  the  current  accounts 
of  customers  and  patrons,  opened  under  the  name  of  the 
debtor,  or  considered  collectively  under  the  title,  Ac- 
counts Receivable;  Customers'  Accounts,  or  Trade 
Debtors;  notes  and  acceptances  payable  to  us  under  the 
title  Bills  Receivable  or  Notes  Receivable;  also  such 
accounts  as  Bonds,  Mortgage  Loans,  and  other  claims 
for  a  definite  amount  of  money  payable  to  us  immediately 
or  remotely. 

71  L.  Rule  for  Accounts  of  Cash  to  be  Paid.  Credit 
such  accounts  to  show  the  amounts  we  assume  to  pay 
out  of  the  business;  charge  such  accounts  to  show  the 
payments  we  make  or  amounts  allowed,  in  settlement  of 
such  credits. 

Note. — Such  accounts  are  simply  the  reverse  of 
those  mentioned  in  71  K,  that  is,  we  are  to  pay  instead 
of  collect.  For  open  accounts  payable,  the  title  is  the 
creditor's  name  and  address,  or  collectively  the  titles, 
Accounts  Payable,  Creditors'  Accounts,  Trade  Cred- 
itors, or  Vouchers  Payable ;  for  notes  and  acceptances 


114         BOOKKEEPING — Charge  and  Credit  ( 71 1-71  R) 

due  others,  Bills  Payable  or  Notes  Payable.  Other  ac- 
counts under  this  summary  are  Bonds,  and  Mortgage 
Loans  Payable,  John  Smith,  Capital,  Capital  Stock,  etc. 

71  M.  Rule  for  Accounts  of  Cost.  Charge  such  ac- 
counts to  show  the  cost  to  us;  credit  such  accounts  to 
show  returns  or  allowances  that  diminish  the  cost. 

Note. — These  accounts  pertain  to  everything  in  the 
way  of  property,  services,  or  uses  secured  for  a  consider- 
ation. Among  them  are,  Furniture  and  Fixtures,  Ma- 
chinery, Real  Estate,  Chattels,  Merchandise  Bought, 
Materials  Bought,  Freight  on  merchandise  or  materials 
bought  and  Expenses. 

71  N.  Rule  for  Accounts  of  Yield.  Credit  such  ac- 
counts to  show  the  source  of  the  value  received;  charge 
such  accounts  to  show  returns  or  allowances  that  dimin- 
ish the  receipts. 

Note. — Among  these  accounts  are  the  following 
titles:  Merchandise  sold,  Wages  Earned,  Services  Sold, 
Exchange,  Collection,  showing  the  revenue  derived  from 
services  of  the  business,  Interest  Received,  showing  the 
income  derived  from  loaning  money. 

71  0.  Cost  and  Yield  may  be  combined  in  one  ac- 
count when  the  cost  and  yield  are  limited  to  some  desig- 
nated part  of  the  given  business,  and  not  to  the  business 
as  a  whole ;  for  example,  Shipments,  charged  for  cost  of 
goods  sent  on  sale,  and  credited  for  proceeds  of  sale;  In- 
terest, charged  for  interest  paid  and  credited  for  interest 
collected ;  Income  and  Expense  (of  property),  charged  for 
the  expenses  and  credited  for  the  incomes  of  a  given 
property;  Trading,  charged  for  the  costs  entering  into 
Merchandise  Bought  and  credited  for  Merchandise  Sold. 

The  present  tendency  of  account  analysis  is  to  dis- 
continue certain  cost  and  yield  accounts  formerly  quite 
common,  especially  where  it  is  plain  that  the  credits  in- 
clude elements  not  found  in  the  debits;  tor  example, 
Merchandise  account,  in  which  the  debit  shows  the  cost 
of  merchandise  bought,  whereas  the  credit  shows  the 
yield  from  not  only  the  merchandise  bought,  but  from 


BOOKKEEPING— Charge  and  Credit   ( 71 1-71  R)  115 

the  store  service;  also  Interest  account,  wherein  interest 
payments  and  receipts  are  often  the  results  of  entirely 
different  operations.  Such  accounts  are,  as  a  rule,  better 
divided;  Merchandise,  into  Merchandise  Bought  and 
Merchandise  Sold;  Interest,  into  Interest  Received  and 
Interest  Paid. 

71  P.     Rule     for     Accounts     of     Re-Classification. 

Charge  such  accounts  to  show  cost  resulting  in  loss ;  credit 
such  accounts  to  show  yield  resulting  in  profit. 

The  entries  in  such  accounts  do  not  represent  trans- 
actions, but  merely  a  re-classification  of  primary  accounts 
under  other  titles. 

Note. — Of  this  nature,  are  accounts  of  Surplus,  Re- 
serve,, Assessments,  Dividends,  or  other  accounts  in  the 
financial  ledger  taken  from  the  Profit  and  Loss  account. 
The  latter  account  is  a  re-classification  from  the  Trading 
account  and  various  primary  accounts.  The  Trading 
account  is  a  re-classification  from  separate  accounts  of 
Merchandise  Bought  and  Merchandise  Sold. 

71 Q.  One  General  Rule,  showing  the  reason  for 
charge  and  credit,  in  all  instances  has  often  been  at- 
tempted, and  we  may  say  successfully  attempted,  from 
a  general  economic  viewpoint.  But  from  the  viewpoint 
of  business  management,  we  must  make  two  rules  for 
charge  and  credit — one  for  cash,  the  other  for  all  ac- 
counts other  than  cash, — to  show  the  real  or  supposed 
relation  of  the  latter  kind  to  the  business  concern  in 
terms  of  cash.  The  following  rules  committed  to  mem- 
ory will  aid  the  bookkeeper  in  making  entries. 

1.  General   Rule   for   Cash   Account:      Charge    to 
show  receipt;  credit  to  show  payment. 

2.  General  Rule  for  Other  Accounts:      Charge  to 
show  cost;  credit  to  show  yield. 

71  R.  Practical  Journalizing.  A  bookkeeper  should 
be  able  to  arrange  any  entry  in  journal  form,  even  though 
that  is  not  the  form  for  the  given  entry  regularly  used 
in  his  books.  There  are  several  reasons  for  this. 


116         BOOKKEEPING— Charge  and  Credit  (71 1-71  R) 

(1).  Complicated  transactions  may  arise  wherein 
he  may  not  see  clearly  the  equality  of  several  charges 
and  credits,  unless  they  are  all  arranged  together  in 
journal  form.  Placing  the  entry  in  journal  form  on  a 
slip  of  paper  will  aid  him  in  arriving  at  the  analysis. 

(2).  The  journal  order  is  the  accepted  means  of 
explaining  to  others  orally  the  accounts  to  be  charged 
and  credited.  While  a  bookkeeper  may  post  charges 
and  credits  from  all  sorts  of  books,  without  direct  refer- 
ence to  an  equality  of  charges  and  credits,  yet  he  should, 
at  any  time,  be  able  to  form  a  mental  or  written  picture 
of  the  equilibrium  of  all  the  accounts  involved,  as  shown 
in  the  journal  entry. 

(3).  In  large  business  concerns,  the  bookkeeping 
system  may  require  that  a  separate  voucher,  or  sheet, 
be  used  to  describe  each  transaction.  When  this  is  the 
case,  the  charges  and  credits  are  written  on  the  voucher, 
making  a  statement  which  is  equivalent  to  a  journal 
entry. 

In  referring  orally  to  the  accounts  to  be  charged 
and  credited,  the  debit  title  or  titles  are  named  first; 
afterward,  the  credit  title  or  titles,  with  "to"  between 
the  charges  and  credits.  Thus,  if  an  entry  requires  that 
John  Smith  be  charged  $50,  and  Merchandise  Sold  be 
credited  $50,  we  would  say  "John  Smith  to  Merchandise 
Sold,  50."  If  a  transaction  should  require  several 
charges,  as  Merchandise  Bought,  $60,  Expense  $5.50: 
and  several  credits,  as  Cash  $10  and  Bills  Payable  $55.50. 
\v<-  would  say,  "Merchandise  Bought  $60,  and  Expense 
$5.50,  to  Cash  $10,  and  Bills  Payable  $55.50."  What- 
ever the  number  of  charges  or  credits,  the  sum  of  the 
charges  must  equal  the  sum  of  the  credits. 

Bookkeepers  are  frequently  at  a  loss  to  read  amounts 
so  as  to  be  quickly  and  easily  understood  by  the  one  to 
whom  read.  In  offices  wln-ro  oral  reading  is  required,  a 

in  for  calling  off  the  numbers  is  necessary  in  order 
to  facilitate  work.  This  system  may  be  learned  in  five 


BOOKKEEPING— The  Ledger  (72-72  S)  117 

minutes,  resulting  in  fully  five  minutes  saved  in  every 
hour's  reading. 

To  read  amounts,  divide  dollars  into  parts  of  three 
figures  each,  beginning  at  the  decimal  point,  and  read 
the  cents  separately;  thus  $56947.83  would  be  divided 
56-947-83  and  read  " fifty-six,  nine  forty-seven,  eighty- 
three."  The  following  amounts  with  the  manner  of 
reading  them  orally  will  probably  answer  as  a  sugges- 
tion for  any  combinations: 

$       129.58     One   twenty-nine,  fifty-eight. 

12900.58     Twelve,    nine    hundred    dollars,    fifty- 
eight. 

12958.00     Twelve,  nine  fifty-eight  dollars. 
.•58     Cents,  fifty-eight. 

1.03  One-0-three.  (The  word  "0"  is  more 
easily  pronounced  than  nought  or 
ought.) 

700.20     Seven  hundred  dollars,  twenty. 
720.00     Seven  hundred  twenty. 

7.20     Seven,  twenty. 
24.00     Twenty-four. 

.24     Cents,  twenty-four. 
1308.07     One,  three-0-eight,  0-seven. 
259546.03     Two  fifty-nine,  five  forty-six,  0-three. 
When  indicating  on  paper,  either  ruled  or  unruled, 
the   titles   affected   by   a   journal   entry,   the   titles   and 
amounts  charged  are  to  be  written  first,  and  to  the  left; 
the  titles  credited  and  their  amounts  are  written  after- 
ward, and  to  thje  right,  thus: 

John  Smith    $50.00 

Merchandise    Sold $50.00 

Merchandise    Bought $60.00 

Expense    5.50 

Cash    $10.00 

Bills  Payable  55.50 

72.  The  Ledger  In  this  division  we  discuss  the  led- 
ger with  reference  to  its  use  by  the  bookkeeper.  The  led- 


118  BOOKKEEPING— The  Ledger   ( 72-72  S) 

ger  is  ordinarily  ruled  so  as  to  divide  the  space  vertically 
into  two  equal  portions — the  left  for  debits,  the  right  for 
credits. 

The  ledger  may  contain  all  of  the  accounts  of  the 
business  in  one  cover,  or  it  may  be  divided  into  several 
ledgers  each  containing  a  certain  section  of  the  accounts. 
(Prin.  72  B  and  72  C.) 

The  ledger  may  consist  of  a  bound  book,  a  loose-leaf 
book,  or  a  case  of  cards.  Each  of  these  forms  have  ad- 
vantages depending  upon  conditions.  (Prin.  72  F,  72  Gl- 
and 72  H.) 

Whatever  the  form,  a  bookkeeper  should  carefully 
consider  the  makeup  of  his  ledger  with  a  view  to: 

1.  The   order  of  the   accounts   for   convenience  in 
posting,  making  trial  balances,  and  statements.     (Prin. 
72  B.) 

2.  Sufficient  space  for  all  entries  likely  to  be  made. 
(Prin.  721.) 

3.  Indexing    of    accounts    for    prompt    reference. 
(Prin.  72  E.) 

4.  Size  and  binding  to  suit  the  kind  and  number  of 
accounts. 

72  B.  The  Complete  Ledger  contains  all  of  the  ac- 
counts in  one  book,  with  the  exception  of  the  cash  account 
when  the  latter  is  kept  in  a  cash  book. 

In  the  ordinary  arrangement,  real  accounts  come 
first  and  the  nominal  accounts  follow. 

The  part  containing  the  real  accounts  is  called  the 
financial  ledger,  and  the  part  containing  the  nominal 
accounts  is  called  the  business  ledger.  These  two  parts 
belong  in  one  book,  although  occasions  arise  where  they 
are  kept  under  separate  book  covers.  The  dividing  line 
between  the  two  is  of  utmost  importance  to  the  auditor. 

In  the  financial  ledger,  the  asset  accounts  are  placed 
first,  these  being  followed  by  the  liability  accounts.  Of 
the  asset  accounts,  the  quick  assets  are  given  first  place, 
followed,  in  order,  by  the  assets  less  easily  convertible 
into  cash ;  then  come  those  most  remotely  convertible, 


BOOKKEEPING— The  Ledger   (72-72  S)  119 

and  finally  those  that  are  not  convertible  at  all.  Follow- 
ing these  are  liability  accounts,  in  like  order,  concluding 
with  the  accounts  of  capital.  Following  this  arrange- 
ment, the  financial  ledger  of  an  ordinary  trading  busi- 
ness might  contain  the  following  accounts  in  the  order 
given:  (1)  Cash;  (2)  Accounts  Receivable  (see  note); 
(3)  Bills  Receivable;  (4)  Inventory;  (5)  Furniture  and 
Fixtures;  (6)  Equipment;  (7)  Real  Estate;  (8)  Good 
Will;  (9)  Accounts  Payable,  (see  note);  (10)  Bills  Pay- 
able; (11)  Mortgages  and  Bonds  Payable;  (12)  Liability 
Inventories;  (13)  Reserves;  (14)  Capital  Accounts. 

In  the  business  ledger,  the  order  of  accounts  is  not 
so  easily  outlined,  owing  to  the  great  diversity  in  kinds 
of  income,  revenue  and  expense.  The  following  is  the 
general  order  sought  in  a  trading  business:  (1)  Mer- 
chandise Sold;  (2)  Merchandise  Bought  (or  other  ac- 
counts primary  to  Trading;  (3)  Trading;  (4)  Expense 
(often  subdivided  into  primary  accounts  of  Selling, 
Office  and  Capital  Expense  and  other  divisions  discussed 
later) ;  (5)  Profit  and  Loss. 

Note. — In  a  complete  ledger,  it  is  impossible  to  re- 
serve space  for  the  accounts  payable  and  receivable  in 
the  order  given  above,  although  that  is  the  order  occu- 
pied by  them  in  a  financial  statement,  or  by  their  con- 
trolling accounts  in  a  general  ledger  (Prin.  72  C).  For 
this  reason,  accounts  payable  and  receivable  are  given 
the  remainder  of  the  ledger,  following  the  Profit  and 
Loss  account,  the  accounts  payable  being  given  a  number 
of  pages  that  can  ordinarly  be  determined,  and  the  ac- 
counts receivable  all  of  the  remainder. 

72  C.  General  and  Subsidiary  Ledgers.  As  a  busi- 
ness increases  in  volume,  it  becomes  more  satisfactory  to 
divide  the  complete  ledger  into  one  general  ledger  and 
one  or  more  subsidiary  ledgers. 

A  subsidiary  ledger  contains  any  group  of  accounts 
of  the  same  class,  when  the  accounts  are  too  numerous 
to  find  place  in  a  complete  ledger.  Thus,  all  the  ac- 
counts receivable  may  be  placed  in  a  subsidiary  ledger; 


120  BOOKKEEPING— The  Ledger  ( 72-72  S) 

likewise,  the  accounts  payable,  the  accounts  of  bills  re- 
ceivable, of  bills  payable,  of  shipments,  of  consignments, 
of  mortgage  loans,  and  other  kinds  of  accounts,  as  they 
become  numerous,  may  be  taken  from  the  complete  led- 
ger and  placed  in  separate  subsidiary  ledgers. 

When  a  subsidiary  ledger  is  kept,  this  ledger  is 
represented  in  the  general  ledger  by  a  controlling  ac- 
count. This  is  an  account  that  shows  the  aggregate  of 
charges  and  credits  posted  to  a  subsidiary  ledger.  The 
aggregates  of  postings  to  subsidiary  ledgers  are  usually 
computed  and  posted  to  the  controlling  accounts  monthly. 
By  including  these  aggregates  found  in  the  controlling 
accounts,  a  trial  balance  of  the  general  ledger  may  be 
taken  without  reference  to  the  subsidiary  ledgers. 

A  separate  list  of  the  accounts  open  in  any  subsid- 
iary ledger  is  verified  by  comparing  the  total  balances  of 
accounts,  with  the  balance  of  the  subsidiary  ledger's 
controlling  account,  in  the  general  ledger,  and  should 
equal  it.  The  following  paragraphs  explain  in  detail 
the  kinds  of  accounts  that  would  be  taken  out  of  the 
complete  ledger  and  placed  in  subsidiary  ledgers  or  other 
books  having  the  same  relation  as  subsidiary  ledgers. 
These  accounts  are  considered  in  about  the  order  that 
would  probably  be  followed  in  taking  them  out  of  the 
complete  ledger  because  of  expanding  business. 

72  D.  Cash  entries  are  ordinarily  entered  in  a  cash 
book,  instead  of  in  the  cash  account  of  a  ledger.  Fre- 
quently a  controlling  account,  entitled  Cash,  is  kept  in 
the  general  ledger.  To  this  controlling  account,  the 
bookkeeper  posts  monthly,  charging  the  total  cash  re- 
ceipts and  crediting  the  total  payments.  In  taking  a 
trial  balance,  the  balance  of  the  controlling -account  can 
conveniently  be  used,  instead  of  referring  to  the  cash 
book  itself. 

It  is  common,  however,  to  regard  the  cash  book  as 
an  account,  under  separate  cover,  yet  belonging  to  the 
general  ledger,  and  requiring  no  controlling  account. 
When  thus  kept,  a  trial  balance  would  require  that  the 


BOOKKEEPING— The  Ledger  ( 72-72  S)  121 

balance  be  taken  from  the  cash  book,  along  with  the  bal- 
ances of  the  accounts  found  in  the  ledger. 

Accounts  Receivable  may  be  kept  in  a  subsidiary 
ledger  called  " Accounts  Receivable  Ledger,"  "Custom- 
ers' Ledger,"  "Sales  Ledger,"  or  some  similiar  name, 
and  the  controlling  account  may  be  entitled,  Accounts 
Receivable,  Trade  Debtors,  or  the  title  may  be  the  name 
of  the  ledger  itself. 

The  customers'  charges  are  posted  to  the  debit  of 
customers'  accounts  in  the  subsidiary  ledger,  and  the 
monthly  totals  of  these  charges  are  posted  to  the  debit 
of  the  controlling  account  in  the  general  ledger.  The 
customers'  credits  for  the  month  are  posted  to  the  credit 
of  the  customers'  accounts  in  the  subsidiary  ledger,  and 
the  monthly  totals  of  the  credits  are  posted  to  the  credit 
of  the  controlling  account  in  the  general  ledger.  (See 
25  E.) 

Accounts  Payable,  Bills  Receivable,  Bills  Payable, 
Capital  Stock,  Consignments,  Shipments,  Agents'  Ac- 
counts, Branch  Store,  are  some  of  the  controlling  accounts 
that  may  be  kept  in  general  ledgers  to  represent  the 
named  classes  of  accounts  in  subsidiary  ledgers,  as  ex- 
plained in  detail  in  foregoing  paragraphs. 

72  E.  The  Index.  The  page  of  a  ledger  account  is 
promptly  located  by  means  of  an  index.  The  index  may 
be  one  or  more  sheets  bound  in  the  ledger,  on  which  the 
account  titles,  followed  by  the  ledger  page,  are  written 
in  alphabetical  order  (Form  12  B) ;  or  it  may  be  a  whole 
book  in  itself  with  capacity  for  as  many  as  100,000 
names.  In  large  books  the  names  are  arranged  accord- 
ing to  the  first  two  or  three  letters  of  the  surname,  as 
are  the  words  in  a  dictionary. 

The  bookkeeper  should  make  it  a  rule  to  index  each 
account  when  it  is  opened. 

Loose-leaf  and  card  ledgers  often  do  not  require  any 
index,  because  the  sheets  or  cards  can  be  arranged  in 
alphabetical  order,  enabling  one  to  locate  an  account 


122  BOOKKEEPING — The  Ledger  ( 72-72  S ) 

from  its  place  in  the  ledger  without  need  of  a  special 
index. 

Small  indexes  are  generally  bound  in  the  first  part 
of  the  ledger ;  larger  ones  under  separate  covers. 

72  F.  Bound  Ledger.  The  bound  ledger,  under 
certain  conditions,  has  advantages  over  the  loose-leaf  or 
card  ledger.  It  is  especially  good  as  a  general  ledger,  for 
this  book  contains,  in  the  main,  monthly  summaries, 
which  do  not  require  much  space  in  a  year's  time,  but 
which  are  used  for  reference  long  after  their  date.  A 
bound  general  ledger  can  be  arranged  to  last  through  the 
entire  general  history  of  a  business.  If  all  the  leaves 
remain  in  a  bound  book,  we  can  easily  assume  that  the 
records  are  intact.  In  a  loose-leaf  book,  there  is  no  as- 
surance that  some  leaves  have  not  been  replaced  by 
others  that  do  not  contain  the  entries  as  written  at  first. 

A  bound  complete  ledger  of  a  small  business  is  often 
better  than  the  loose-leaf  form,  because  it  costs  less,  does 
not  require'  any  transfer  apparatus,  and  can  be  carried 
around  without  fear  of  losing  some  of  it.  This  is  worth 
considering,  especially  in  an  office  not  well  provided  with 
conveniences  for  the  safe-keeping  of  office  books  and 
papers. 

72  G.  The  Loose-Leaf  Ledger  consists  of  a  binder, 
and  the  sheets,  the  latter  being  securely  fastened  in, 
although  removable  at  pleasure.  The  loose-leaf  arrange- 
ment is  ordinarily  preferable  to  the  bound  book  for  sub- 
sidiary ledgers.  Subsidiary  ledgers  usually  contain  many 
accounts  which  may  either  extend  unexpectedly  over 
several  pages  of  space,  or  else  may  be  closed  at  any  time. 
A  bookkeeper  would  not  find  it  convenient  to  have  a 
great  many  closed  accounts  filling  the  working  ledger, 
nor  can  he,  in  the  case  of  an  account  that  has  overrun  the 
space  provided  for  it,  conveniently  forward  it  to  any 
odd  page  where  he  might  happen  to  find  room,  as  was 
done  before  loose-leaf  ledgers  were  used.  Also,  it  adds 
considerably  to  a  bookkeeper's  work  to  index  numerous 
accounts  and  afterward  have  to  locate  them  through  the 


BOOKKEEPING— The  Ledger  (72-72  S)  123 

index.  With  a  loose-leaf  ledger,  the  bookkeeper,  can  re- 
move closed  accounts  entirely,  thus  keeping  the  whole 
ledger  for  active  accounts.  If  an  account  runs  over  the 
leaf  provided  for  it,  another  leaf  can  be  inserted  and  the 
account  continued.  The  bookkeeper  can  file  all  removed 
leaves  in  other  binders  called  Transfer  Binders.  This  is 
considered  sufficient  care  to  take  of  settled  accounts  that 
are  kept  merely  for  reference  in  the  matter  of  future 
collections  or  payments.  As  the  transferred  accounts 
can  be  inserted  where  desired,  they  may  be  in  alphabeti- 
cal order  by  surnames,  or  towns,  or  in  any  other  order 
that  may  be  more  convenient  for  self -indexing. 

72  H.  The  Card  Ledger  consists  of  ledger  accounts 
kept  on  cards  of  suitable  size  and  arranged  in  drawers. 
The  cards  can  be  arranged  on  any  plan  possible  with  a 
loose-leaf  system,  and  are  more  easily  sorted  from  one 
division  to  another.  When  there  are  a  great  many  ac- 
counts, and  it  is  desired  to  make  statements,  or  otherwise 
go  over  them  in  a  very  short  time,  the  cards  can  be  di- 
vided among  many  clerks,  who  can  each  do  his  share  of 
the  work,  and  thus  complete  the  whole  quickly.  The 
card  ledger  is  convenient  for  transient  accounts,  to  be 
referred  to  by  a  number  of  persons  at  the  same  time, 
during  the  day's  transactions.  It  is  also  convenient  for 
accounts  with  customers  who  are  moving  about  between 
territories  for  which  separate  sales  ledgers  are  kept. 

72  I.  Space  for  Ledger  Accounts.  If  a  bound  ledger 
is  to  be  opened,  consider  the  number  of  pages  in  the  entire 
ledger,  and  divide  that  space  among  the  accounts,  giving 
each  account  the  number  of  pages  you  think  will  be  filled 
by  the  time  the  entire  ledger  is  filled.  If  you  have  a 
former  ledger  to  guide  you,  allow  space  as  seems  justi- 
fied by  past  experience.  In  assigning  account  space  in 
a  general  ledger,  remember  that  controlling  accounts,  as 
a  rule,  are  posted  but  once  a  month,  so  that  from  one  to 
three  lines  per  month  will  suffice.  On  a  basis  of  three 
lines  per  month,  36  lines  would  be  enough  for  a  year,  or 
360  lines  for  10  years.  This  can  easily  be  reduced  to 


124  BOOKKEEPING— The  Ledger  ( 72-72  S) 

pages.      Other    accounts    may    require     more     or    less 
guessing. 

If  loose-leaf  or  card  ledgers  are  used,  allow,  as  a  rule, 
one  account  for  each  leaf  or  card,  inserting  additional 
leaves  or  cards  as  needed. 

72  J.  Posting  to  Ledgers.  Posting  comprises  a 
large  part  of  the  bookkeeper's  work.  Any  plans  that 
promise  increased  accuracy  or  certainty  are  worth  con- 
sidering, because  they  may  save  time.  Bad  methods  of 
posting,  or  the  absence  of  a  method,  may  become  a  habit 
with  a  bookkeeper,  causing  the  loss  of  hundreds  of  hours 
of  his  time  in  the  course  of  a  year,  and  greatly  diminish- 
ing his  earning  power. 

When  a  bookkeeper  does  not  know,  from  location 
or  from  memory,  the  pages  of  his  ledger  accounts,  the 
following  method  will  save  time  and  mental  effort.  Be- 
fore beginning  to  post,  write  from  the  index,  the  account 
pages  in  the  postmark  columns  of  the  posting  books, 
opposite  all  amounts  to  be  posted.  Then  post  all  debits, 
beginning  with  the  first  pages  of  the  ledger  and  progres- 
sing to  the  last,  so  far  as  this  can  be  done  on  a  single 
page  of  the  posting  book.  Indicate  posting  by  a  check 
mark.  It  is  not  a  very  good  plan  to  write  page  figures 
in  the  posting  books  during  the  process  of  posting,  be- 
cause the  pa"ge  figures  (relatively  unimportant)  would 
receive  attention  when  the  mind  should  be  highly  con- 
centrated upon  the  smallest  possible  area  of  effort.  Try 
to  carry  as  little  as  possible  in  mind,  except  what  you  are 
actually  writing  in  the  ledger,  and  where  you  are  writ- 
ing it.  The  figures  must  be  absolutely  correct  and  placed 
in  the  right  accounts.  After  you  have  posted  all  charts. 
glance  back  over  all  pages  of  the  posting  book,  to  see 
that  no  entry  has  been  overlooked.  If  you  always  make 
the  check  mark  immediately  after  posting  the  entry, 
you  can  know  that  the  omission  of  a  check  mark  m»  ;ms 
a  failure  to  post  the  item  not  checked. 

Post  the  credits  in  the  same  way.  Remember  that 
in  posting,  the  habit  of  doing  the  same  process  in  the 


BOOKKEEPING— The  Ledger  ( 72-72  S)  125 

same  way  is  your  best  protection  against  errors.  If  you 
are  not -methodical,  you  may  make,  in  a  second,  a  slip  in 
posting  that  will  cause  you  hours  to  discover. 

If  you  know  the  pages  of  the  ledger  accounts,  or  if 
you  use  a  self-indexing  ledger,  it  is  a  waste  of  time  to 
place  the  ledger  pages  in  the  post  mark  column  of  the 
posting  book.  A  check  mark  is  sufficient. 

72  K.  Verifying  the  Posting.  After  all  charges 
and  credits  are  posted  to  the  accounts  in  a  double  entry 
ledger,  it  is  customary  to  verify  the  work  monthly,  or 
oftener  if  thought  advisable.  Since  the  sum  of  all 
charges  is  equal  to  the  sum  of  all  credits  in  the  posting 
book,  it  follows  that  after  the  posting  is  completed,  you 
must  have  posted  an  equal  aggregate  of  charges  and 
credits  into  the  ledger  accounts,  that  is,  that  you  have 
not  disturbed  the  equality  of  the  total  ledger  debits  and 
credits.  The  ordinary  proofs  of  posting  are  given  in 
Prin.  72  L  and  72  M.  " 

72  L.  Taking  a  Proof  Sheet  is  the  easiest  means  of 
assurance  that  the  ledger  is  in  balance.  This  consists  of 
a  list  of  all  the  debit  and  credit  account  footings  ar- 
ranged in  two  columns.  The  equal  footings  of  debit 
and  credit  columns  tends  to  show  that  there  was  no  over- 
sight in  posting  the  entries.  (See  Form  12 1.)  The 
proof  sheet  is  quickly  taken  on  two-column  paper,  or,  if 
an  adding  machine  is  at  hand,  by  listing  the  debits  first, 
then  the  credits. 

72  M.  The  Trial  Balance  is  a  list  of  the  open  ac- 
count titles,  with  the  balance  of  each  account  placed  in 
either  the  left  or  the  right  column  accordingly  as  it  is 
a  debit  or  a  credit  balance.  To  make  a  trial  balance 
requires  more  time  than  to  make  a  proof  sheet  because 
it  is  necessary  to  compute  the  balances  of  the  accounts, 
whereas,  in  the  proof  sheet  only  the  totals  are  used.  The 
trial  balance  is  more  useful  for  reference,  as  in  any  re- 
view of  the  business,  the  balances  of  the  accounts  would 
be  of  more  interest  than  the  totals.  The  equality  of 


126  BOOKKEEPING— The  Ledger  (72-72  S) 

debit  and  credit  totals  in  the  trial  balance,  shows  the 
ledger  to  be  in  balance. 

Some  account  totals  of  a  statistical  nature,  as  well 
as  such  account  balances,  may  be  of  interest  to  the  one 
who  examines  a  trial  balance.  Such  totals  may  be  placed 
in  the  explanatory  space  before  the  money  columns,  as 
illustrated  in  Form  12  J. 

Note. — A  great  many  accountants  call  a  list  of  ac- 
count titles  with  the  debit  and  credit  totals  (instead  of 
the  debit  or  credit  balances)  a  trial  balance.  As  a 
matter  of  convenience  in  the  discussions  arising  in  this 
book,  the  term  trial  balance  should  be  taken  to  mean  a 
trial  balance  of  account  balances,  while  a  trial  balance 
of  account  totals  is  referred  to  as  a  proof  sheet. 

72  N.  When  the  Trial  Balance  Does  not  Foot 
Equally.  (See  Prin.  63  D.) 

72  0.  Closing  the  Ledger  involves  three  important 
processes:  (1)  the  re-adjustment  of  the  financial  ac- 
counts so  as  to  exhibit  the  assets  and  liabilities  of  the 
business  at  their  revised  valuation  when  the  books  are 
closed;  (2)  the  transfer  of  the  balances  of  the  nominal 
accounts  into  Profit  and  Loss,  which  shows  as  a  result  a 
net  profit  or  a  net  loss;  (3)  the  distribution  of  net  profits 
or  losses  from  the  business  ledger  to  the  financial  ledger 
into  such  acounts  as  may  be  determined  by  the  owners. 

Below  are  given  the  various  steps  of  ledger  closing 
in  paragraphs  numbered  72  P,  72  Q,  and  72  R,  for  finan- 
cial ledger ;  and  72  S  for  business  ledger. 

72  P.  The  Inventory  Account.  When  closing  a 
ledger,  if  this  account  shows  charges  or  credits  from  the 
beginning  of  the  fiscal  period,  such  amounts  should  be 
transferred  from  the  Inventory  account  in  the  financial 
ledger  to  the  nominal  accounts  to  which  they  apply. 
For  example,  the  charge  of  merchandise  to  Inventory 
account  from  the  beginning  of  a  fiscal  period,  is  closed 
into  Trading  account  at  the  close  of  the  fiscal  period. 

The  Inventory  account  should  be  charged  for  the 
inventory  of  merchandise  taken  at  date  of  closing.  This 


BOOKKEEPING— The  Ledger   (72-72  S)  127 

charge  is  balanced  by  a  credit  to  Trading  account. 
(Prin.  26.) 

The  Inventory  account  should  be  charged  for  any 
other  asset  inventories  at  date  of  closing.  The  charge 
is  balanced  by  crediting  the  nominal  account  which  is 
used  to  show  the  final  disposition  of  the  assets. 

Liability  Inventory  account  should  be  credited  for 
current  liability  inventories  taken  at  the  time  of  closing. 
These  credits  are  balanced  by  charges  against  such  nomi- 
nal accounts  as  show  the  final  disposition  of  the  inven- 
tories. (See  Prin.  34.) 

After  the  foregoing  entries  have  been  made,  the.  In- 
ventory account  shows,  as  debits,  all  assets,  and  the 
Liability  Inventory  account  shows,  as  credits,  all  re- 
sources and  liabilities  that  are  floating. 

72  Q.  Accounts  of  Fixed  Assets.  The  accounts  of 
fixed  assets  are  examined  at  the  time  of  closing  to  de- 
termine the  amount  of  depreciation  during  the  fiscal 
period  then  terminating.  If  it  is  decided  that  the  values 
of  any  of  the  fixed  assets  have  diminished  below  the  cost 
as  shown  by  the  account,  the  amount  of  depreciation 
should  be  credited  to  Reserve  for  Depreciation,  or  to 
the  account  itself  under  circumstances  explained  in  Prin. 
29.  (See  35  B.)  This  credit  is  balanced  by  a  charge  to 
the  proper  expense  account  in  the  business  ledger. 

72  R.  Closing  the  Financial  Ledger.  After  the  net 
profit  for  distribution  of  a  given  fiscal  period  is  deter- 
mined and  the  amount  rests  in  the  Profit  and  Loss  ac- 
count, a  final  entry  must  be  made,  to  transfer  this  amount 
to  the  financial  ledger.  Net  profit  may  be  credited  to 
proprietors'  Capital  accounts,  or  to  proprietors' 
Drawing  accounts,  in  a  non-stock  company;  in  a  stock 
company  it  should  be  credited  to  a  Dividend  account,  a 
Surplus  account,  an  Undivided  Profits  account,  a  gen- 
eral or  special  Reserve  account  or  it  may  be  divided 
among  two  or  more  of  these,  as  decided  by  the  owners. 
When  so  carried,  the  Profit  and  Loss  account  is  charged, 
and,  being  in  balance,  is  ruled. 


128  BOOKKEEPING— The  Journal   ( 73-73  G) 

A  net  loss  may  be  charged  to  owners'  Capital  or  to 
Drawing  accounts,  in  a  sole  proprietorship  or  partner- 
ship. In  the  case  of  a  stock  company,  it  may  be  charged 
to  Surplus  or  general  Reserve  accounts  if  there  is  suffi- 
cient credit  to  balance  the  loss,  or  to  an  Assessment  ac- 
count, if  it  is  intended  to  collect  the  loss  from  the  stock- 
holders. The  charge  is  balanced  by  a  credit  to  Profit  and 
Loss  account.  After  posting,  the  Profit  and  Loss  ac- 
count, being  in  balance,  should  be  ruled. 

72  S.  Closing  the  Business  Ledger.  In  a  trading 
business,  after  inventories  have  been  posted  to  the  nomi- 
nal accounts  involved,  close  the  primary  accounts  of 
Merchandise  Bought  and  Merchandise  Sold  into  the 
Trading  account.  Close  Trading  account  and  all  other 
nominal  accounts  into  Profit  and  Loss ;  finally  close  Profit 
and  Loss  into  the  financial  accounts  as  explained  in  72  R. 

73.  The  Journal  is  the  only  book  designed  to  con- 
tain all  original  entries.  Every  business  transaction 
may  be  correctly  entered  in  the  journal.  In  certain 
simple  lines  of  business,  a  journal  and  a  ledger  are,  all 
things  considered,  the  only  books  needed.  But  com- 
monly, the  ordinary  routine  entries  of  a  business  are 
made  in  special  books,  leaving  for  the  journal  only  such 
entries  as  are  of  an  unusual  nature  or  importance. 

On  account  of  the  importance  of  such  journal  en- 
tries as  are  made  for  reference,  and  their  relatively  rare 
occurrence  under  ordinary  working  conditions,  especial 
emphasis  is  placed  on  a  full  and  complete  explanation 
of  the  entries  rather  than  on  the  matter  of  making  them 
rapidly.  Young  bookkeepers  often  think  they  have  done 
well  enough,  if  they  merely  indicate  the  ledger  accounts 
to  be  charged  and  credited  in  a  journal  entry,  with  a 
bare  hint  at  the  nature  of  the  transaction  in  the  explana- 
tory portion.  The  experienced  bookkeeper  is  more  con- 
cerned about  clear  and  complete  memoranda,  knowing 
that,  in  the  journal,  rather  than  in  other  books  of  origi- 
nal entry,  are  to  be  found  records  of  transactions  that 
may  lead  to  misunderstanding  and  litigation,  especially 


BOOKKEEPING— The  Journal   ( 73-73  G)  129 

among  the  owners  of  the  business,  if  full  facts  are  not 
clearly  stated. 

73  B.  Different  Uses  for  Journal.  A  complete 
journal  (73  C)  contains  all  original  entries,  of  whatever 
nature,  that  pertain  to  a  given  business.  A  general 
journal  (73  D)  contains  such  entries  as  the  other  special 
books  do  not  provide  for.  A  special  journal  (73  E) 
contains  entries  of  a  special  nature,  as  may  be  in- 
dicated by  such  names  as  sales  journal^  purchase  journal, 
shipment  journal,  credit  journal,  debit  journal,  and  the 
like.  A  columnar  journal  (73  F)  is  one  that,  in  addi- 
tion to  the  two  ordinary  charge  and  credit  money  col- 
umns, has  other  columns  in  which  are  grouped  entries  of 
a  special  kind. 

73  C.  The  Complete  Journal  contains  all  original 
entries,  and  is  ruled  so  as  to  provide  space  for  date, 
memoranda,  ledger  titles,  postmark,  and  amounts.  These 
different  parts  of  the  entry  are  arranged  in  somewhat 
different  order  by  different  bookkeepers  or  under  vary- 
ing conditions. 

Form  12  A  is  recommended  as  good.  To  the  left  is 
placed  the  date,  which  is  the  first  thing  looked  for  in 
referring  to  an  entry.  The  wide  space  in  the  center 
provides  space  for  the  considerable  amount  of  mem- 
oranda usually  required  in  a  journal  entry.  Below  the 
memoranda  are  placed  the  titles  of  the  ledger  accounts 
affected  by  the  transaction.  The  charge  title  is  placed 
one  space  to  the  left  of  the  memoranda  in  order  to  make 
it  clearly  distinguishable,  and  above  the  credit  title, 
which  is  placed  slightly  to  the  right  of  the  charge  title. 
Opposite  these  titles,  in  the  money  columns,  are  the 
amounts.  These  are  placed  in  the  charge  and  credit 
columns  respectively  and  on  the  same  writing  lines  with 
the  titles.  Immediately  before  the  money  columns  is  the 
postmark  column.  The  postmark  column  should  be 
close  to  the  amounts  for  greater  convenience  in  post- 
marking, as  the  posting  proceeds,  and  to  permit  the 


130  BOOKKEEPING — The  Journal   (73-73  G) 

bookkeeper  to  verify  more  quickly  the  posting  of  the 
amounts. 

A  journal  may  be  footed,  as  in  the  model,  to  show 
equality  of  charges  and  credits  before  posting. 

The  complete  journal  is  often  a  journal  of  several 
columns  as  described  in  73  F. 

73  D.  The  General  Journal  may  be  ruled  in  any 
form  used  for  the  complete  journal.  The  term,  general, 
implies  that  there  are  also  special  books  kept  for  the 
entries  of  certain  special  kinds  of  transactions,  and  that 
the  unclassified  transactions,  or  those  of  a  general  signifi- 
cance, are  to  be  recorded  in  the  journal  for  entries  of 
such  general  nature. 

The  complete  journal  and  the  general  journal  may 
be  thus  distinguished:  The  complete  journal  contains 
all  transactions,  whereas  the  general  journal  contains 
only  such  transactions  as  have  not  been  entered  in  other 
special  books.  For  example,  assuming  that  in  an  ordi- 
nary trading  business,  the  three  most  numerous  classes 
of  transactions  will  find  record  in  special  books,  rather 
than  in  the  journal,  (i.  e.  cash  received  and  paid  in  the 
cash  book,  merchandise  bought  in  the  bought  book,  mer- 
chandise sold  in  the  sold  book),  there  remain  certain  kinds 
of  entries  to  be  looked  for  in  the  general  journal.  Among 
them  are:  (1)  entries  affecting  the  Capital  accounts; 
(2)  entries  showing  the  closing  of  the  books;  (3)  entries 
of  an  unusual  nature;  (4)  entries  of  correction  or  ad- 
justment; (5)  entries  or  memoranda  of  contracts,  agree- 
ments, etc.;  (6)  entries  that  appear  in  part  in  some  other 
book  of  original  entry,  but  cannot  .appear  wholly  in  the 
special  book.  When  such  occur,  the  journal  entries  are 
iv<j-;inlr<|  ;is  rnlrirs  Id  In-  posted.  ;iiid  tin-  rnlrirs  iii  the 
special  books,  as  entries  already  posted.  An  entry  in  a 
special  book  is  to  be  checked  out,  not  posted  to  the  ledger 
when  it  is  covered  by  an  entry  in  the  general  journal. 

73  E.  A  Special  Journal  contains  a  certain  kind  of 
entries  that,  for  convenience,  are  separated  from  the 
general  journal.  In  a  sense,  all  books  of  original 


BOOKKEEPING— The  Journal   ( 73-73  G)  131 

are  journals,  and  entries  in  them  may  be  properly  re- 
ferred to  as  journal  entries.  A  so-called  "special  jour- 
nal" is  rather  in  the  nature  of  an  abstract  of  certain 
entries  that  have  been  arranged  and  put  in  balance  be- 
fore posting.  Thus,  a  sales  journal  contains  the  dates, 
titles,  terms  and  amounts  of  sales,  that  is  to  say,  an  ab- 
stract of  sales,  gathered  from  bills,  and  balanced  ready 
for  posting;  a  purchase  journal  contains  a  similar  ab- 
stract of  invoices;  a  shipment  journal  contains  an 
abstract  of  shipments,  similarly  arranged.  Debit  jour- 
nals are  frequently  used  in  banks  and  wholesale  houses, 
and  contain  no  entries  but  the  charges;  credit  journals, 
on  the  other  hand,  contain  no  entries  but  the  credits. 

A  "sales  journal"  differs  from  a  "sales  book"  in 
that  the  sales  journal  contains  merely  posting  data,  while 
the  sales  book  contains  a  full  record ;  the  same  difference 
applies  to  other  "journals"  and  "books"  of  like  relation. 

In  old  style  bookkeeping,  the  memoranda  of  trans- 
actions were  entered  in  a  "day  book,"  from  which  the 
facts  necessary  for  posting  were  transferred  to  a  "jour- 
nal." The  journal  in  this  relation,  therefore,  was  a 
mere  intermediate  book  between  day  book  and  ledger, 
and  contained  posting  data  only. 

While  the  old  time  day  book  and  skeleton  journal 
are  no  longer  in  use,  but  are  now  combined  in  one  book 
retaining  the  title,  journal,  we  yet  have  certain  special 
"journals"  that  are  used  as  abstract  posting  mediums, 
having  in  this  respect  the  same  characteristics  as  the  old 
fashioned  skeleton  journal. 

73  F.  A  Columnar  Journal  has  one  or  more  special 
money  columns,  in  addition  to  the  two  general  money 
columns.  The  special  columns  are  used  to  separate  items 
of  a  given  kind  from  the  general  miscellany  of  items,  so 
that  those  thus  separated  may  be  added  and  their  sum 
treated  as  one  amount  for  posting  to  a  controlling  ac- 
count or  for  reference.  If  these  were  left  in  the  general 
column,  they  would  have  to  be  posted  or  collected  for 
reference  one  at  a  time.  The  special  column  principle, 


132  BOOKKEEPING — The  Journal   ( 73-73  G) 

when  properly  applied,  has  saved  an  immense  amount  of 
time  in  bookkeeping,  but,  on  the  other  hand,  when  its 
application  was  faulty,  it  has  caused  a  great  deal  of 
extra  labor. 

A  special  column  can  be  used  advantageously  only 
.for  frequently  repeated  entries  that  are  recorded  con- 
secutively with  the  other  entries  by  one  bookkeeper. 
"Where  several  persons  are  working  on  the  same  set  of 
books,  it  is  generally  more  economical  of  time  and  effort 
to  substitute  special  books  of  entry  instead  of  adding 
special  columns  to  a  journal.  There  may  be  instances 
where  a  special  sales  column  in  a  journal,  allowing  the 
sales  to  be  entered  in  the  journal  along  with  other  items, 
would  work  out  to  better  advantage  than  to  separate  the 
sales  entries  from  the  journal  into  a  sales  book.  But 
this  would  seldom  be  advisable. 

The  advantage  of  a  special  column  in  a  journal  must, 
in  each  instance,  be  compared  with  the  alternative  ad- 
vantage of  suppyling  a  special  book  to  contain  the  en- 
tries which  the  special  column  is  planned  for,  or  with 
the  extra  work  of  posting  singly  from  a  general  column 
the  items  assignable  to  the  special  column. 

A  special  column  should  not  be  added  to  a  journal 
unless  it  is  clear  that  the  extra  labor  of  making  entries 
in  this  column,  of  carrying  the  footings  of  the  column 
forward  from  page  to  page,  and  finally  of  proving  the 
total  at  the  end  of  the  posting  period,  would  be  less  than 
the  labor  of  posting  the  given  entries  from  a  general 
column.  This  will  depend  on  the  circumstances. 

73  G.  A  Cash  Journal  may  be  used  to  great  advan- 
tage under  certain  conditions.  A  form  of  this  journal 
contains  four  money  columns — two  for  charges  and 
credits  that  require  posting  to  ledger  accounts— 
and  two  for  deposits  in  the  bank  and  checks 
drawn  against  the  deposits.  This  journal  is  par- 
ticularly well  suited  for  private  individuals  who 
wish  to  keep  concise,  accurate  accounts  of  their 
property  and  obligations,  together  with  their  incomes 


BOOKKEEPING— The  Journal   ( 73-73  G)  133 

and  expenses.  It  contains  a  complete  record  of  all 
transactions  that  involve  property,  claims  receivable,  and 
obligations  payable,  and  may  contain  any  other  memo- 
randa for  journal  record.  A  detailed  description  fol- 
lows: 

Form  12  W.  Referring  to  this  form,  there  are  shown 
five  descriptive  columns,  followed  by  four  money  col- 
umns. The  first  column  is  for  the  date,  the  second  for 
explanatory  matter,  the  third  for  titles  of  ledger  ac- 
counts, the  fourth  for  the  check  number,  (used  when 
the  transaction  involves  the  issuance  of  a  check),  the  fifth 
for  the  postmark  of  amounts  in  the  general  columns 
posted  to  the  ledger.  The  first  money  column  is  for 
amounts  to  be  posted  as  ledger  debits  (except  the  charges 
to  expense,  which  are  to  be  posted  to  the  expense  book. 
(See  Prin.  74  F,  Illustration  No.  1.)  This  expense  book 
is  conveniently  bound  in  the  same  cover  with  the  ledger.) 
The  second  money  column  is  for  amounts  to  be  posted  to 
the  credit  of  ledger  accounts.  The  third  and  fourth 
money  columns  are  really  the  bank  checking  account — 
the  deposits  and  checks  being  carried  directly  to  these 
columns  instead  of  being  posted  to  them  from  the  jour- 
nal, thus  saving  the  time  required  for  this  extra  posting. 
At  the  end  of  the  month,  the  totals  of  deposits  and  checks 
are  carried  to  the  general  debit  and  credit  columns,  re- 
spectively, thus  completing  the  equality  of  the  two  gen- 
eral columns. 

When  such  a  book  is  used,  it  is  more  convenient  to 
balance  the  bank  columns  and  carry  the  balance  down  in 
the  journal  to  the  following  month,  as  shown  in  the  form, 
rather  than  to  post  the  totals  of  these  two  columns  to  a 
bank  acount  in  the  ledger,  as  could  be  done.  When 
carrying  the  totals  of  these  two  columns  to  the  general 
column  at  the  close  of  the  following  month,  care  must 
be  taken  to  exclude  the  balance  carried  down  from  the 
preceding  month,  that  is,  to  carry  only  the  receipts  and 
payments  of  the  current  month  to  the  general  column. 

Note. — Additional  comment,  not  strictly  pertaining 


134  BOOKKEEPING— The  Cash  Book  ( 74-74  H) 

to  the  journal,  may  be  inserted  here  in  order  to  complete 
the  outline  of  the  entire  procedure  of  household  account- 
ing, which  if  properly  carried  on,  is  very  valuable  in 
results  as  well  as  simple  in  execution.  « 

Following  the  best  usage  of  business  generally,  all 
family  moneys  should  be  deposited  in  a  bank  under  a 
checking  account.  Progressive  savings  banks  and  the 
ordinary  commercial  banks  welcome  individual  checking 
accounts,  because  a  bank  checking  account  is  a  step  to- 
ward thrift.  Having  placed  the  funds  in  a  checking 
account,  the  cash  disbursements,  being  by  check,  are  a 
matter  of  record.  Those  who  desire  to  classifiy  the  family 
expenses,  sometimes  experience  difficulty  in  securing  a 
convenient  record  for  the  large  aggregate  of  payments 
constantly  made,  a  few  coins  at  a  time.  If  each  person 
who  spends  the  household  money  will  supply  himself 
with  cash  by  means  of  checks,  and  carry  with  him  a 
ticket  on  which  to  jot  down  the  expenditures  as  they 
occur,  this  ticket  (returned  to  the  household  bookkeeper 
when  the  proceeds  of  the  check  is  exhausted)  will  provide 
the  memoranda  from  which  the  expenditures  may  be 
classified  in  the  expense  book. 

74.  The  Cash  Book  contains  the  daily  record  of 
cash  receipts  and  payments.  It  thus  takes  the  place  of 
the  journal,  as  a  record  of  cash  transactions.  The  cash 
book  also  provides  for  the  entries  of  receipts  in  a  column 
separate  from  the  entries  of  payments,  making  it  equiva- 
lent to  a  ledger  account  of  Cash. 

Besides  the  general  receipt  and  payment  columns 
used  in  all  cash  books,  one  or  more  special  columns  may 
be  added  for  classifying  special  kinds  of  receipts  and 
payments,  thus  making  a  columnar  cash  book. 

The  cash  book  should  contain  a  satisfactory  explan- 
ation of  all  receipts  and  payments.  Every  entry  should 
be  fully  explained,  if  there  is  no  voucher  to  support  it, 
or,  if  there  is,  this  voucher  should  be  described  in  the 
entry  in  such  a  way  as  to  make  it  easy  to  find.  This 
book  is  to  be  kept  with  care;  entries  are  to  be  made 


BOOKKEEPING— The  Cash  Book   ( 74-74  H)  135 

promptly,  for  it  contains  the  explanation  as  to  all  re- 
.ceipts  and  payments  of  cash.  If  business  is  at  all  active, 
cash  book  balances  resulting  from  these  receipts  and 
payments  should  be  compared  with  the  cash  on  hand  at 
the  close  of  the  day.  Any  discrepancy  should  be  ac- 
counted for  at  that  time.  There  is  the  possibility  that 
certain  cash  has  been  received,  which  the  cash  book  does 
not  account  for,  thus  making  cash  "over;"  or  cash  may 
have  been  paid  which  was  not  entered  and  cannot  be 
remembered,  thus  making  cash  "  short. "  In  either  case, 
if  the  bookkeeper  cannot  find  the  missing  entry,  he  should 
enter  a  cash  debit  for  the  cash  "over,"  or  a  cash  credit 
for  the  cash  "short,"  and  post  this  entry  to  an  account 
entitled,  Cash  Short  and  Over  in  the  business  ledger. 

Cash  receipts  are  posted  to  the  credit  of  such  ledger 
accounts  as  explain  the  yield  to  the  business;  cash  pay- 
ments are  posted  to  the  debit  of  such  .ledger  accounts  as 
explain  the  cost  to  the -business. 

There  may  occur  certain  cash  book  entries  which 
should  not  be  posted  to  the  ledger;  for  example,  a  com- 
bined journal  and  cash  book  entry  like  this:  Machinery 
$500  to  Bills  Payable  $400  and  Cash  $100.  In  this  case, 
the  complete  entry  would  be  made  in  the  journal,  and 
the  payment  of  $100,  after  it  is  entered  in  the  cash  book, 
would  be  postmarked  "J"  to  show  that  the  correspond- 
ing charge  for  the  cash  credit  of  $100  is  included  in  the 
charge  to  Machinery  of  $500,  which  is  to  be  posted  from 
the  journal,  and  checked  out  of  the  cash  book.  Like- 
wise, any  entries  in  both  cash  book  and  journal  are 
checked  out  of  the  cash  book  to  the  journal,  while  the 
posting  is  done  from  the  journal. 

The  cash  book  may  be  balanced  and  ruled  daily, 
monthly,  or  at  any  other  period  suited  to  the  require- 
ments of  the  business. 

74  B.  The  One  Page  Cash  Book  (see  Form  10  B  or 
11  A)  has  a  column  for  date  at  the  left,  followed  by 
explanatory  space,  as  wide  as  possible,  with  money  col- 
umns for  receipts  and  payments  at  the  right.  Just  fol- 


136  BOOKKEEPING— The  Cash  Book   ( 74-74  H) 

lowing  the  explanation,  and  preceding  the  money  col- 
umns, are  two  columns — one  for  the  names  of  the  ledger 
accounts  to  which  the  amounts  in  the  following  money 
columns  are  to  be  posted,  the  other  for  the  postmarks, 
which  consist  of  the  ledger  page,  showing  where  to  post, 
and  a  check  mark,  showing  posting  done.  Cash  receipts 
are  posted  to  the  credit  of  ledger  accounts ;  cash  payments 
to  the  debit.  In  the  illustrated  cash  book,  no  distinction 
is  made  between  currency  and  check  payments.  If  a 
bank  checking  account  is  kept,  a  record  of  deposits, 
checks  and  bank  balance  should  appear  in  the  check 
stubs. 

74  C.  In  the  Two  Page  Cash  Book  (see  Form  13  B) 
the  cash  receipts  a*re  entered  on  the  left-hand,  or  debit 
page,  and  the  cash  payments  on  the  right-hand,  or  credit 
page.  On  the  debit  side,  the  first  money  column  is  re- 
served for  current  -receipts,  which  are  extended  by  totals 
into  the  second  column,  when  deposits  are  made;  the 
amounts  extended  should  agree  with  the  deposit  tickets. 
It  is  usually  possible  to  deposit  all  cash  receipts  in  a 
bank,  and  this  should  be  done  except  under  unusual  con- 
ditions. 

At  the  end  of  the  month,  any  cash  left  over  after 
banking  hours,  should  be  entered  on  a  deposit  ticket, 
and  deposited  separately  from  the  receipts  of  the  follow- 
ing day,  thus  enabling  the  bookkeeper  to  extend  all  re- 
ceipts of  the  month  into  the  second,  or  deposits,  column. 

On  the  right,  the  payments,  which  are  all  by  check, 
are  entered  in  the  first  column  and  extended  into  the 
second  column  from  time  to  time  to  compare  with  the 
deposits.  The  balance  is  the  difference  between  llu* 
second  columns  of  the  two  pages. 

Entries  in  the  cash  book  should  show  from  whom 
cash  is  received  and  to  whom  cash  is  paid.  This  is  the 
most  natural  thing  to  write  when  paying  or  iv<-ri\ -injr 
cash,  and  definitely  locates  the  persons  dealt  with.  Tlinv 
should  also  be  a  sufficient  explanation  to  show  the  pur- 
pose of  the  receipt  or  payment.  After  this  explanation, 


BOOKKEEPING— The  Cash  Book   ( 74-74  H)  137 

the  ledger  title  to  be  credited  from  cash  received,  or 
charged  from  cash  paid,  can  be  written  or  indicated  in 
the  space  before  the  postmark  column,  at  the  convenience 
of  the  bookkeeper.  Then  the  posting  can  be  done. 

Petty  payments  of  coin  or  bills  have  no  place  in  the 
main  cash  book.  If  placed  in  it,  they  confuse  the  bank 
account.  Petty  entries  also  require  time  to  be  spent  un- 
necessarily in  posting.  Although  such  payments  cannot 
be  avoided,  they  should  be  provided  for  by  the  issuance 
of  a  check  to  the  cashier  (see  entry  Nov.  1)  for  a  Cashier's 
fund  to  meet  petty  disbursements,  which  he  accounts  for 
in  the  petty  expense  book.  (Prin.  74  E.) 

Care  should  be  taken,  when  the  main  cash  book  is 
balanced,  to  rule  up  both  sides  on  the  same  writing  line. 
Enter  the  balance  in  red,  and  carry  it  down  in  black  ink, 
as  the  balance  is  in  the  bank,  the  amount  is  carried  down 
to  the  second  column  of  the  debit  side. 

74  D.  The  Check  Stub  contains  a  record  of  cash 
payments  by  check,  (further  record  on  the  stub  being 
unnecessary  if  kept  with  a  cash  book)  as  explained  in 
Frin.  74  C.  As  a  check  is  not  likely  to  be  issued  out  of 
the  check  book  without  the  stub  being  left,  record  for 
every  payment  is  practically  assured.  In  addition  to 
that  record,  the  check,  passing  through  the  payee's 
hand?,  with  his  endorsement,  is  returned  to  the  maker 
from  the  bank  as  a  receipt.  These  advantages  of  paying 
by  check  make  it  advisable  that  all  disbursements  except 
from  the  Cashier's  fund  be  made  in  that  way.  The 
entries  on  the  credit  side  of  the  cash  book  are  taken  from 
the  stubs. 

Note. — When  a  check  book  is  carried  about-,  instead 
of  being  used  in  the  office,  it  is  generally  advisable  that 
the  stub  contain  the  record  of  deposits  as  well  as  checks, 
so  that  the  balance  can  be  forwarded  on  the  stub  for 
immediate  reference.  Forwarding  balances  on  the  stubs 
involves  extra  work  and  often  gives  rise  to  errors,  unless 
very  carefully  attended  to,  so  that  the  check  book  used 


138  BOOKKEEPING— The  Cash  Book  ( 74-74  H) 

in  the  office  often  does  not  contain  any  other  stub  record 
than  that  of  the  checks  issued. 

74  E.  The  Petty  Expense  Book,  also  called  Petty 
Cash  Book,  as  commonly  used  in  a  business  office,  is  a 
two  column  scratch  book  containing  a  record  in  the 
debit  column  of  checks  issued  to  the  cashier  for  petty 
payments,  and  in  the  credit  column,  entries  of  the  pay- 
ments made.  The  form  is  similar  to  Form  10  A.  This 
record  shows  the  disposition  of  the  money,  which  is  all 
that  is  desired.  The  account  of  the  Cashier's  Fund  in 
the  ledger  is  charged  for  the  expense  checks  as  issued. 
From  time  to  time,  as  the  Cashier's  Fund  runs  low,  the 
cashier  makes  a  voucher  for  the  amount  expended,  and 
receives  a  check,  which  restores  the  petty  expense  fund 
to  the  original  amount.  The  entry  in  the  general  cash 
book  for  this  voucher  is  charged  to  Expense. 

74  F.  The  Complete  Expense  Book  may  be  used  to 
great  advantage,  where  it  is  desired  to  classify  expenses 
under  a  number  of  special  headings.  Such  a  book  con- 
tains one  general  column  at  the  left,  to  which  are  posted 
from  the  cash  book,  and  from  the  journal  when  the 
journal  contains  expense  entries,  all  charges  that  are 
included  in  the  general  term  expense.  To  the  right  of 
this  column,  are  placed  a  number  of  columns,  each 
headed  to  show  a  particular  kind  of  expense.  The  en- 
tries that  were  posted  to  the  first  general  column  of  this 
book,  are,  at  the  convenience  of  the  bookkeeper,  or  when 
he  secures  the  necessary  information,  distributed  among 
the  several  columns.  The  sums  of  the  special  columns 
should  equal  the  sum  of  the  first  general  column.  The 
totals  of  the  special  columns  may  be  posted  to  the  special 
expense- accounts  in  the  ledger,  which  are  named  to  cor- 
respond with  the  headings  of  the  columns,  once  a  month 
or  once  a  year.  When  it  is  not  thought  necessary  to  post 
the  sums  of  the  expense  columns  at  all,  the  total  expense 
should  be  included  in  the  trial  balance  as  one  item  which 
is  explained  in  detail  by  the  distribution  shown  in  the 
separate  columns  of  the  expense  book. 


BOOKKEEPING— The  Cash  Book   ( 74-74  H)  139 

Illustrations:  (1)  In  household  bookkeeping,  a 
check  for  $20  (see  Form  12  W,  check  No.  6)  may  be  is- 
sued to  a  member  of  the  family  for  family  expenses. 
This  amount  would  be  posted  from  the  original  entry  to 
the  general  column  in  the  complete  expense  book.  Later 
on,  the  member  of  the  family  may  return  a  ticket  or 
memorandum  showing  that  the  $20  had  been  disbursed: 
for  clothing,.  $10.80 ;  for  groceries,  $6.59;  for  car  fare,  25 
cts. ;  for  literature,  $1.10 ;  for  a  frying  pan,  25  cts. ;  unac- 
counted for  or  personal  expenditure,  $1.01  (see  Form 
12  X).  These  amounts  can  be  distributed  from  the  report 
to  the  various  columns  headed  to  correspond  with  the 
various  classes  of  expense  mentioned  in  the  memorandum. 
The  last  item  is  best  entered  in  a  column  headed  Personal 
Expense  (with  the  name  of  the  member  of  the  family 
who  is  spending  the  money).  Separate  columns  of  per- 
sonal expenditure  for  each  member  of  the  family  will 
tend  to  locate  any  disproportion  in  the  personal  expendi- 
tures of  the  various  persons  in  the  family  which  would 
otherwise  be  overlooked.  The  totals  of  these  special 
columns  in  the  expense  book,  should  equal  the  total  of 
the  general  column.  Any  ordinary  business  house  may 
distribute  the  expenses  in  a  similar  book. 

(2).  In  a  department  store,  (especially  in  a  retail 
store  whose  departments  are  in  the  hands  of  managers 
responsible  for  department  profits)  it  is  advantageous 
to  distribute  the  expenses  through  a  complete  expense 
book,  to  the  departments  as  well  as  to  the  general  Office 
and  Capital  Expense  accounts.  Thus,  weekly  salaries 
amounting  to  $321.40  should  be  distributed:  to  Office, 
$105.40;  to  Department  No.  1,  $31.25;  to  Department  No. 
2,  $45.60 ;  and  so  on  until  the  entire  amount  is  distributed. 
Rent,  light,  and  heat  are  distributed  according  to  floor- 
space  occupied  ;  advertising  according  to  newspaper 
space — all  expenses  according  to  the  department  bene- 
fitted  thereby. 

The  totals  of  the  respective  special  columns  are 
charged  monthly  to  the  corresponding  ledger  accounts. 


140  BOOKKEEPING— The  Cash  Book  (74-74  H) 

74  G.  All  cash  receipts,  large  and  small,  should  be 
entered  in  the  main  cash  book  on  the  day  of  their  receipt. 
However,  some  discrimination  must  be  used  in  deciding 
whether  to  enter  them  directly  into  the  cash  book  when 
the  cash  is  taken  in,  or  to  make  some  primary  record 
first.  Retail  stores  usually  record  small  cash  sales  in 
cash  registers,  and  transfer  the  totals  to  the  cash  book 
at  the  close  of  the  day.  If  a  cash  register  is  not  used,  a 
cash  sales  sheet  will  effect  the  same  result.  The  device 
to  record  the  cash  sales  depends  on  their  number,  and 
the  precautions  thought  necessary  to  insure  a  complete 
record. 

74  H.  The  Columnar  Cash  Book,  also  called  Special 
Column  Cash  Book,  is  a  cash  book  containing  special  col- 
umns, in  addition  to  the  columns  for  the  cash  account. 

(1).  A  special  column  is  used  to  segregate  fre- 
quently repeated  items  that  are  to  be  posted  to  the  same 
ledger  account.  Such  items,  standing  alone,  can  be 
added  and  their  sum  posted  with  less  labor  than  would 
be  required  to  post  the  items  separately  from  a  miscel- 
laneous column.  Thus,  if  there  were  a  hundred  entries 
on  the  credit  side  of  the  cash  book,  all  charging  Mer- 
chandise Bought,  the  bookkeeper  would  be  obliged  to 
post  them  one  at  a  time  from  a  miscellaneous  column, 
making  one  hundred  operations.  But  if  the  amounts 
were  carried  to  a  special  column  for  Merchandise  Bought, 
the  total  of  that  column  could  be  posted  in  one  operation. 

A  special  column  on  the  receiving  side  of  cash  is 
frequently  advisable  for  Merchandise  Sold.  Columns 
for  accounts  receivable,  accounts  payable,  discounts,  and 
expenses  are  often  advisable. 

(2).  When  the  complete  ledger  is  divided  into  one 
general  and  one  or  more  subsidiary  ledgers,  special 
columns  are  necessary  for  the  items  that  are  to  be  posted 
to  the  -ubsidiary  ledgers.  The  items  in  such  special 
columns  are  posted  separately  to  the  several  accounts  in 
the  subsidiary  ledger,  and  their  total  to  the  controlling 
account  of  that  ledger,  in  the  general  ledger. 


BOOKKEEPING— The  Cash  Book  ( 74-74  H)  141 

Thus,  when  the  sales  ledger  is  a  subsidiary  book,  a 
column  headed  Accounts  Receivable  in  the  cash  book 
(receiving  side)  will  contain  the  amounts  of  all  cash 
receipts,  on  book  account,  from  customers.  These  en- 
tries are  to  be  posted  severally  to  the  sales  ledger,  and 
their  total  to  Accounts  Receivable,  (the  controlling  ac- 
count) in  the  general  ledger. 

Likewise,  when  the  purchase  accounts  are  kept  in  a 
subsidiary  purchase  ledger,  a  similarly  used  special  col- 
umn in  the  cash  book  (paying  side)  would  be  headed 
Accounts  Payable. 

In  the  commission  business,  a  similar  column  headed 
Consignors,  segregates  the  payments  chargeable  to  ac- 
counts in  a  subsidiary  consignors'  ledger. 

(3).  Whatever  special  columns  are  included  in  a 
columnar  cash  book,  there  must  be  a  general  and  a  net 
cash  column  on  the  receiving  side  and  a  general  and  a 
net  cash  column  on  the  paying  side,  in  order  to  make 
the  book  easily  handled,  and  readily  audited:  (a)  the 
receiving  and  the  paying  sides  should  have  a  general 
column  in  each,  to  show  all  amounts  to  be  posted  to  the 
general  ledger.  Such  general  columns  are  headed,  "gen- 
eral," "sundries,"  "general  ledger,"  or  "main  ledger" 
by  different  bookkeepers,  all  meaning  the  same  thing; 
(b)  net  cash  columns  are  necessary  in  order  promptly  to 
determine  the  cash  balance  at  any  time.  The  net  cash 
column  on  the  debit  side  is  headed,  "net  cash,"  "re- 
ceipts," or  "net  receipts;"  on  the  credit  the  headings 
may  be  "net  cash,"  "checks,"  or  "net  payments,"  etc. 
Different  bookkeepers  use  different  headings.  Both  the 
net  receipt  and  the  net  payment  columns  are  footed  in 
pencil  or  red  ink  from  time  to  time,  when  it  is  desired 
to  determine  the  cash  balance  without  balancing  the  cash 
book. 

Other  columns  may  be  placed  between  the  general 
and  the  net  columns  of  either  side,  the  number  of  special 
columns  depending  on  the  number  of  kinds  of  items  the 
bookkeeper  wishes  to  segregate  from  the  general  posting 


142  BOOKKEEPING— The  Cash  Book  ( 74-74  H) 

column  for  the  purpose  of  posting  by  totals.  For  a 
fuller  description  and  illustration  of  a  columnar  cash 
book,  study  the  following  paragraphs: 

(4).  (Form  161).  The  form  given  illustrates  a 
columnar  cash  book  adaptable  to  a  wholesale  or  a  whole- 
sale and  retail  business,  either  departmentized  or  not.  A 
change  in"  one  or  two  headings  will  adapt  it  to  a  voucher 
system,  to  manufacturing,  or  to  a  commission  business. 

On  the  Receiving  Side,  beginning  with  column  No. 
1,  is  the  date.  Column  No.  2  contains  the  name  of  the 
person  from  whom  cash  is  received  and  any  other  explan- 
atory matter.  Column  No.  3  shows  the  titles  of  such 
acounts  as  are  posted  to  the  general  ledger,  direct  from 
the  entry.  Column  No.  4  contains  the  post  marks. 
Column  No.  5  shows  the  amounts  to  be  posted  direct  to 
the  general  ledger.  These  amounts  consist  of  a  number 
of  first  entries,  and,  at  the  close  of  the  month,  the  totals 
from  columns  6,  7,  and  8.  Columns  Nos.  6  and  7  are 
considered  together.  No.  6  shows  the  credits  to  cus- 
tomers who  have  remitted  on  book  account,  No.  7,  the 
amounts  of  cash  discount  allowed  them.  For  example, 
on  Nov.  2,  James  Lee  receives  credit,  $108.62,  for  pay- 
ment of  his  invoice  of  Nov.  1,  (11-1).  He  was  allowed 
$1.09,  cash  discount,  having  actually  paid  $107.53,  as 
shown  in  the  net  cash  column,  No.  9,  in  settlement  of  that 
item.  Column  No.  8  shows  the  total  of  the  miscellaneous 
cash  sales  made  during  the  day.  This  total  may  be  taken 
from  cash  registers,  a  list  of  cash  sales  tickets  on  sales 
sheets,  or  otherwise  totaled  on  primary  records  before 
transfer  to  the  cash  book.  Column  No.  9  shows  cash 
actually  received,  which  has  previously  been  entered 
for  posting  in  one  or  several  of  the  columns  Nos.  4,  5,  6, 
7  and  8.  Column  No.  10  shows  the  extensions  from 
column  No.  9,  agreeing  with  the  deposits  as  made.  On 
the  last  day  of  the  month,  any  cash  received  after  bank- 
ing hours  is  entered  on  a  deposit  ticket,  and  deposited 
the  next  day  separately  from  the  receipts  of  the  next 
day.  By  this  means,  the  entire  receipts  of  the  month 


BOOKKEEPING— The  Cash  Book  (74-74  H)  143 

may  be  extended  to  the  deposit  column.     The  footing  of 
the  deposits  column  is  the  total  cash  debit. 

When  the  cash  book  is  balanced,  the  entries  of  the 
receiving  side  are  proved  correct  by  comparing  the  total 
of  columns  Nos.  5,  6,  and  8,  diminished  by  the  total  of 
column  No.  7,  with  the  total  of  the  net  cash  column. 
When  found  correct,  the  totals  of  columns  Nos.  6  and  8 
are  carried  down  to  the  general  column,  to  be  posted  as 
credits  in  the  general  ledger,  and  the  total  of  column 
No.  7  is  carried  to  the  general  column  to  be  posted  as  a 
debit  in  the  general  ledger. 

On  the  paying  side,  columns  Nos.  11,  13,  14,  15,  and 

16  are  used  for  cash  credits  similarly  to  columns  Nos.  1, 
2,  3,  4  and  5  for  cash  debits.    Column  No.  12  is  inserted 
to  give  the  check  numbers  for  reference.     Columns  Nos. 

17  and  18  show  charges  to  creditors  on  book  account, 
and   cash  discounts   allowed,   the  net   remittance   being 
entered  in  column  No.  21.     All  payments  are  made  by 
check,  so  that  the  column  headed  Checks  is  the  net  cash 
column.     Items  too  small  for  a  check  are  paid  by  the 
cashier  out  of  a  fund  which  is  charged  to  an  account  in 
the  ledger.     (See   check  No.   589.)      When  the   cashier 
needs  more  money  for  small  payments,  he  turns  in  the 
voucher  for  the   currency  payments  he  has  made,   and 
takes  a'  check  for  their  amount,  which  leaves  him  with 
the  original  expense  fund  of  $50.     (See  check  No.  615.) 
Column  No.  19     shows  payments  which  will  be  added, 
and  charged  to  Merchandise  Bought  at  the  end  of  the 
month.     Column  No.  20  shows  all  items   chargeable  to 
Expense.    In  a  business  sufficiently  well  organized  to  use 
this  form  of  cash  book,  there  would  unquestionably  be 
several  subdivisions  of  the  expense  account.     It  is  im- 
practicable to  insert,  in  a  compact  cash  book,  columns 
for  such  subdivisions.     To  distribute  the  items  in  this 
column,  post  them  to  the  expense  book,  (see  Prin.  74  P) 
where   they   can   be   distributed  to   the   extent   desired, 
either  in  unit  or  department  organization. 

Before  balancing  the  cash  book,  the  disbursements 


144         BOOKKEEPING — The  Mdse.  Sold  Book  ( 75-75  E) 

are  proved  by  adding  the  sums  of  columns  Nos.  16,  17, 
19,  20  and  subtracting  from  the  total  the  sum  of  column 
No.  18.  The  result  should  equal  the  sum  of  column  No. 
21.  Columns  Nos.  17  to  20  are  carried  to  the  general 
column  for  posting  as  on  the  side  of  the  cash  book  for 
receipts.  The  balance  is  then  entered  in  the  column  No. 
21,  (red  ink)  and  after  ruling  and  balancing,  is  carried 
below  the  ruling  to  column  No.  10. 

75.  A  large  share  of  the  bookkeeping  work  in  most 
concerns  is  given  to  Records  of  Merchandise  Sold.  Hence, 
any  means  of  arranging  and  abbreviating  selling  records, 
so  as  to  reduce  the  clerical  labor  involved,  results  in  an 
appreciable  saving  of  labor.  The  matter  of  saving  time 
and  labor  in  connection  with  sales  records  is  deemed  so 
important,  that  a  number  of  distinct  systems  have  been 
devised.  A  suitable  one  for  a  given  business  may  be 
selected  from  these.  For  example,  a  system  suitable  for 
recording  the  sales  of  a  retail  grocery,  or  meat  market 
would  be  entirely  inadequate  for  recording  the  sales  of 
a  retail  lumber  yard.  Neither  of  these  would  be  suitable 
for  a  wholesale  grocery,  dry  goods  or  drug  house.  In 
this  chapter,  systems  of  sales  records  for  typical  con- 
ditions are  discussed. 

75  B.  The  ordinary  Merchandise  Sold  Book  (see 
Form  13  C) — commonly  called,  in  the  office,  the  sold  book, 
sales  book  or  order  book — is  ruled  much  like  a  journal. 
Journal  ruling  will  do  very  well  for  the  purpose,  although 
some  of  the  vertical  lines  of  the  journal  are  not  needed 
in  a  merchandise  sold  book.  In  the  form,  the  date  of  the 
sale  is  at  the  left,  the  name  of  the  buyer  and  the  terms 
following  on  the  same  line.  Below,  in  the  explanatory 
space,  are  the  items  extended  into  the  first  money  col- 
umn. The  total  is  carried  to  the  second  column.  Dis- 
counts allowed  at  time  of  sale  should  be  deducted,  before 
carrying  the  charge  to  the  second  column.  If  the  sale 
is  tor  cash,  the  amount  is  charged  to  the  cash  account 
(see  cash  sale  Nov.  2  or  Nov.  24,  charged  to  Cash  on 
Form  13  B).  If  the  merchandise  is  sold  on  book  ac- 


BOOKKEEPING— The  Mdse.  Sold  Book  ( 75-75  E)          145 

count,  the  amount  is  posted  to  the  debit  of  the  customer's 
ledger  account.  (See  charge  sale  Nov.  7  posted  to  131.) 
If  the  merchandise  is  sold  for  a  note,  the  amount  is 
charged  to  Bills  Receivable  account,  in  the  same  manner 
as  a  charge  sale  is  to  an  individual  account. 

The  merchandise  sold  book  is  footed  and  the  total, 
at  the  end  of  the  month,  is  posted  to  the  credit  of  Mer- 
chandise Sold  accounts.  (See  total,  Nov.  30,  posted  to 
Form  13  F.) 

Thus,  if  the  sold  book  has  the  correct  total  before 
final  posting,  there  will  be  entered  in  the  cash  book  and 
posted  to  the  ledger  an  aggregate  of  charges  equal  to 
the  credit  posted  to  the  Merchandise  Sold  account. 

750.  The  Duplicate  Merchandise  Sold  Book  con- 
tains a  number  of  bills  to  customers,  printed  on  one  page, 
perforated  at  the  margins,  so  that  the  bills  may  be  re- 
moved and  delivered  to  the  customers.  The  sheet  under 
the  bill  to  be  delivered,  is  a  duplicate  without  perforation, 
to  be  retained  and  posted  from,  as  from  an  ordinary  sold 
book.  The  copy  of  the  bill  delivered  is  made  on  the  du- 
plicate sheet  by  means  of  carbon  paper  inserted  between 
the  sheets.  This  enables  the  billing  clerk  to  make  the 
bill  and  the  office  record  at  one  writing.  The  duplicate 
sheet  is  often  on  paper  of  a  different  tint  from  the  bill 
sheet,  so  that  the  two  may  be  readily  distinguished. 

A  number  of  these  duplicate  sheets  may  be  bound 
in  a  book,  or  they  may  be  kept  loose,  to  be  transferred 
into  a  loose-leaf  binder.  The  loose-leaf  binder  is  better 
where  great  numbers  of  sales  are  made,  as  one  binder 
may  hold  a  thousand  or  more  duplicate  sheets. 

Other  systems  of  duplicate  billing  are  described 
later.  This  system  is  good  in  any  bulk  merchandising 
or  service  business,  where  the  items  billed  are  compara- 
tively uniform  in  number. 

75  D.  Shopkeepers'  Bill  and  Charge  System.  Gro- 
cers, butchers,  and  other  shopkeepers  frequently  have 
regular  customers  to  whom  they  sell  daily  on  account. 
In  order  to  avoid  the  labor  of  posting  the  daily  charges 


146         BOOKKEEPING — The  Mdse.  Sold  Book  ( 75-75  E) 

to  customers  *  accounts,  it  is  quite  common  to  keep  a 
separate  bill  and  charge  book  for  each  customer.  Such 
a  book  contains  a  number  of  sales  tickets  alternating 
with  other  tickets  for  carbon  duplication.  When  an 
order  is  filled  the  sale  ticket  shows  the  items,  and  these, 
as  entered,  are  copied  on  the  duplicate  by  means  of  a 
carbon  paper  device.  At  the  top  of  the  money  column 
of  the  charge  tickets  and  duplicates,  the  balance  due  has 
been  carried  from  the  previous  ticket.  This  amount  is 
added  in  with  the  extensions  of  the  present  ticket,  and 
the  total  carried  forward  to  the  following  ticket  and 
duplicate.  Thus  the  amount  owed  by  the  customer  is 
always  apparent  both  on  the  bill  and  the  duplicate,  when- 
ever an  order  is  filled.  If  the  customer  makes  a  payment 
on  account,  the  amount  is  entered  on  the  following  ticket 
and  subtracted  from  the  balance  carried  forward. 

The  bill  and  charge  books  for  the  several  customers 
are  arranged  on  a  rack  in  the  order  of  the  customers' 
names  taken  alphabetically. 

The  total  of  accounts  receivable  may  be  found  at  any 
time  by  adding  the  balances  shown  in  these  books. 

75  E.  In  the  wholesale  business,  where  orders  are 
taken  largely  by  traveling  salesmen,  or  from  the  mail, 
and  where  the  great  volume  of  business  demands  close 
daily  attention  to  profits  and  expenses,  the  following 
described  system  of  records  for  merchandise  sold  is  in 
use  in  many  of  the  best  houses : 

The  orders  for  goods,  whether  coming  from  traveling 
salesmen,  from  the  mail,  or  by  telephone,  or  from  a  cus- 
tomer at  the  counter,  are  placed  on  uniform  order  blanks, 
(see  Form  16  A)  showing  buyer,  quantity  of  each  item, 
prices,  "routing,  and  terms.  The  order  blanks  also  have 
memoranda  spaces  to  designate  the  salesman  who  took 
the  order,  the  credit  man  who  passed  it,  the  shipping 
clerk  who  filled  it,  the  bill  clerk  who  billed  it,  the  carrier 
by  which  it  was  forwarded,  and  the  department  from 
which  the  goods  were  taken,  if  a  departmentized  business. 
These  spaces  are  filled  by  the  initials  of  the  responsible 


BOOKKEEPING— The  Mdse.  Sold  Book  ( 75-75  E)          147 

persons  through  whose  hands  the  order  passes  while  being 
disposed  of. 

After  the  order  is  approved  by  the  credit  man,  it  is 
entered  in  an  order  register  (see  Form  16  B)  from  which 
it  receives  its  number.  This  order  register  is  to  keep 
the  order  in  mind  at  the  office,  while  the  order  itself  is 
going  the  route  in  being  filled. 

When  filled,  the  shipping  clerk  places  his  initial  in 
the  blank  space  of  the  sheet,  provided  for  that  purpose, 
and  returns  it  to  the  office  where  it  is  marked  off  the 
shipping  register.  The  order  sheet  is  then  passed  to  the 
bill  clerk  who  makes  out  the  bill  for  it,  which  is  mailed 
to  the  customer. 

After  the  bill  clerk  has  finished  the  billing,  the  order 
sheet  is  passed  to  the  bookkeeper,  who  posts  the  charge 
to  the  debit  of  the  customer's  ledger  account. 

After  posting  to  customers'  accounts  the  loose  order 
sheets  are  assembled,  placed  in  numerical  order,  to  make 
sure  that  none  are  missing,  and  bound  in  a  loose-leaf 
binder.  (See  Form  16  C.) 

At  the  close  of  the  month,  the  sheets  in  the  loose-leaf 
binder  are  totaled,  (an  adding  machine  should  be  used 
where  possible)  and  the  total  posted  to  the  credit  of  the 
Merchandise  Sold  'account ;  or  if  the  store  is  department- 
ized,  the  credits  would  be  divided  among  the  various 
Department  Sales  accounts,  through  sales  distribution 
sheets.  (See  Form  16  D.)  The  debit  amounts  to  bal- 
ance these  credits,  have  already  been  posted  to  the  cus- 
tomer's accounts  in  a  complete  ledger,  or,  if  the  cus- 
tomer's accounts  are  kept  in  a  subsidiary  ledger,  the 
total  sales  would  be  posted  to  the  debit  of  Accounts 
Receivable  (the  controlling  account)  in  the  general 
ledger. 

Note. — Before  placing  these  order  sheets  in  a  binder, 
if  daily  profits  are  to  be  computed,  the  sheets  will  be 
passed  to  the  profit  clerk,  who,  from  the  cost  of  each 
article  shown  on  a  cost  sheet,  will  compute  the  profit  on 


148         BOOKKEEPING— The  Mdse.  Sold  Book  ( 76-76  D) 

each  item  sold,  and  show  from  their  total,  the  daily  gross 
profit  on  sales. 

When  the  orders  are  sent  in  by  different  salesmen, 
the  sales  manager  can  satisfy  himself  as  to  the  amount 
of  sales  each  salesman  makes,  by  assorting  the  sales  sheets 
by  salesmen's  names  and  entering  the  amounts  in  col- 
umns headed  for  the  several  salesmen.  (See  Form  16  E.) 

76.  Merchandise  Bought  Records.  The  records  of 
merchandise  bought  are  kept  in  different  ways,  depending 
on  the  volume,  terms  of  purchase,  and  other  circum- 
stances, as  well  as  on  the  requirements  of  the  general 
accounts  affected.  For  example,  the  records  of  mer- 
chandise bought  in  a  department  store  must  be  kept  in 
different  form  from  those  of  a  store  not  departmentized. 
Some  kinds  of  business  require  constant  ready  reference 
to  past  itemized  invoices,  when  future  orders  are  placed ; 
some  do  not.  Some  require  a  method  for  determining 
maturity  dates  of  invoices,  in  order  to  take  discounts; 
some  do  not.  The  following  described  systems  for  rec- 
ords of  merchandise  bought  are  suitable  for  most  con- 
ditions : 

76  B.  The  ordinary  Merchandise  Bought  Book  (see 
Form  13  D),  called  in  the  office  the  "Bot.  Book"— also 
called  the  purchase  book,  purchases  •  book,  or  invoice 
book — contains  the  buying  records  entered  in  form  sim- 
ilar to  the  records  in  an  ordinary  sold  book,  showing 
date,  from  whom  bought,  terms,  items  extended  to  the 
first  column,  and  the  total  amount  in  second  column. 

The  amount  of  an  invoice  bought  on  account  is 
posted  to  the  credit  of  the  firm  bought  from  (see  entry 
Nov.  2,  posted  to  Form  13  H) ;  the  amounts  of  merchan- 
dise bought  for  cash  are  balanced  by  entries  on  the  credit 
side  of  the  cash  book  (see  entry  Nov.  6,  balanced  by  cash 
payment  in  Form  13  B) ;  the  amounts  of  merchandise 
bought  for  notes  or  acceptances  are  posted  to  the  credit 
of  Bills  Payable. 

The  bought  book  is  footed  at  the  end  of  the  month, 
and  the  total  is  charged  to  Merchandise  Bought  account 


BOOKKEEPING— The  Mdse.  Bot.  Book   ( 76-76  D)         149 

in  the  ledger.  (See  total  Nov.  30,  posted  to  Form  13  G.) 
Thus,  if  the  bought  book  is  footed  correctly  before  final 
posting,  there  will  be  carried  to  the  cash  book  and  ledger, 
credits  that,  in  the  aggregate,  will  equal  the  total  carried 
to  the  debit  of  Merchandise  Bought  account. 

76  C.  Buying  Records  Suitable  for  Extensive  Busi- 
ness. In  most  concerns,  merchandise  is  bought  mainly 
on  account,  and  in  many  lines,  is  subject  to  discount  for 
early  payment.  Points  in  the  record  to  keep  in  mind  are 

(1)  to  give  credit  to  the  firm  from  whom  bought  on  ac- 
count (if  not  on  account,  credit  Cash  or  Bills  Payable)  ; 

(2)  to  make  a  monthly  charge  to  the  Merchandise  Bought 
account  for  the  total. 

In  order  to  insure  payments  without  loss  of  discount 
or  credit,  a  record  should  also  be  kept  of  the  maturities 
and  discount  dates  of  the  invoices  payable.  Also,  the 
invoices  themselves  should  be  kept  where  they  are  readily 
accesible  for  reference. 

When  the  invoice  is  received,  the  following  steps  are 
taken  for  its  disposal: 

(1).  Compare  the  items  in  the  invoice  with  the 
actual  goods  received,  checking  off  the  items  that  agree. 
Place  the  pencil  check  marks  before  the  items.  (See 
Form  16  F.)  The  check  marks  show  that  the  goods  were 
actually  received  as  billed,  that  there  were  no  shortages 
or  omissions. 

(2).  Verify  the  extensions,  that  is,  see  that  the 
multiplications  and  additions  on  the  bill  are  correct. 
Indicate  these  verifications  by  check  marks  also. 

(3).  See  that  the  goods  received  agree  with  your 
order  as  to  terms,  items,  prices  and  samples. 

(4).  If  any  errors  are  found  in  the  invoice,  report 
such  errors  at  once  to  the  firm  bought  from,  sending  the 
original  invoice  and  asking  for  a  corrected  invoice,  or 
other  adjustment  as  the  case  may  require.  Do  not  make 
any  entry  until  the  adjustment  is  completed. 

(5).  If  the  invoice  is  found  correct,  indicate  its 
verification  by  writing  "0.  K. "  or  other  words  signi- 


150         BOOKKEEPING— The  Mdse.  Bot.  Book   ( 76-76  D) 

fying  that  it  is  ready  for  entry.  In  the  model,  the  in- 
voice has  been  passed  by  a  person  whose  initials  are 
"R.  L.  D." 

(6).  The  verified  invoice  should  be  given  a  one-line 
entry  in  the  invoice  register  (see  Form  16  H)  from 
which  it  is  posted  to  the  creditor's  account,  if  it  was  a 
credit  purchase.  When  conditions  are  such  that  the 
invoices  are  to  be  paid,  regardless  of  any  discount  period, 
only  the  left  page  of  the  invoice  register  will  be  needed, 
and  the  right  page,  as  shown  in  the  form,  may  be  dis- 
regarded. Where  a  strict  watch  is  kept,  to  pay  bills 
within  a  discount  period,  the  date  set  for  payment 
should  be  entered  in  the  given  month  column  of  the 
date  payable  section. 

When  the  invoices  are  charged  to  departments,  in- 
stead of  to  the  general  Merchandise  Bought  account,  the 
amount  of  the  invoice  is  carried  to  the  proper  depart- 
ment column. 

A  check  mark  placed  over  the  date,  in  the  date 
payable  column,  will  indicate  that  the  payment  of  the 
invoice  has  been  attended  to. 

Note. — In  department  bookkeeping,  it  is  customary 
for  wholesalers  to  enter  the  full  amount  of  the  invoice 
in  the  invoice  register,  allowing  the  discount,  when  paid, 
to  go  to  a  Discount  from  Creditor's  account.  In  a  retail 
department  store,  the  discounts  are  usually  deducted 
and  the  bills  entered  at  the  net  amount.  The  reason 
for  this  is,  that  the  manager  of  each  department  (also 
called  the  buyer)  is  considered  entitled  to  show  profits 
for  his  department,  based  on  the  best  price  (including 
discount)  that  he  is  able  to  secure  on  his  purchases.  In 
the  latter  case,  if  the  management  of  the  store  should 
fail  to  take  advantage  of  discounts —  an  unusual  occur- 
t.  IK.  this  discount  would  be  chargeable  to  Office  Ex- 
pense, and  not  to  the  cost  of  Merchandise  Bought  for 
Ilif  given  department. 

(7).  After  the  invoice  is  entered  and  numbered,  it 
is  placed  in  ;i  filo  with  other  invoices  from  the  same  firm. 


BOOKKEEPING— The  Mdse.  Bot.  Book   ( 76-76  D)          151 

A  vertical  file,  with  separate  compartments  for  each 
customer  (see  Form  16  J)  is  used  where  there  are  many 
invoices. 

Note. — Invoices  are  sometimes  pasted  into  invoice 
books,  from  which  they  are  posted  to  the  accounts.  This 
kind  of  invoice  book  is  going  out  of  use,  because  it  is 
necessarily  bulky,  inconvenient,  and  difficult  to  post 
from;  besides,  the  books  that  have  been  filled  occupy 
much  storage  space. 

(8).  When  an  invoice  is  paid,  it  is  taken  from  the 
file  and  sent  to  the  creditor  to  be  receipted  and  returned. 
"When  a  receipted  bill  is  returned,  it  is  again  placed  in 
the  file. 

Remittances  may  be  made  without  sending  the  in- 
voices with  the  remittance ;  in  that  case,  a  receipt  should 
be  returned,  which  is  filed. 

(9).  At  the  close  of  the  month,  the  footings  of  the 
invoice  register  are  charged  to  Merchandise  Bought  ac- 
count (or  to  department  accounts  if  these  are  carried). 
The  credits  have  already  been  posted  to  the  various  ac- 
counts payable,  if  in  a  complete  ledger;  but  if  the 
accounts  payable  ledger  is  subsidiary,  the  total  is  posted 
to  the  proper  controlling  account  in  the  general  ledger. 

76  D.  The  Voucher  System  for  accounts  payable 
is  a  method  in  which  original  invoices,  or  special  ab- 
stracts of  the  invoices  are  used,  in  place  of  the  ledger 
accounts.  The  following  paragraphs  outline  the  voucher 
system  as  ordinarily  used. 

When  an  invoice  payable  is  allowed,  a  blank  form 
called  a  voucher  form,  or  a  voucher  jacket,  is  filled  in 
with  whatever  written  memoranda  necessary  to  describe 
the  invoice,  and  to  show  the  account  or  accounts  to  be 
charged  for  the  purchase.  The  form  is  given  a  one-line 
record  in  a  vouchers  payable  register.  This  is  a  col- 
umnar special  journal,  having  debit  columns  headed  to 
show  the  different  ledger  accounts  charged  for  the  several 
purchases  which  may  include  merchandise,  material  for 
manufacture,  expense  material,  services  or  other  items. 


152         BOOKKEEPING— The  Mdse.  Bot.  Book   ( 76-76  D) 

A  credit  column,  headed  Vouchers  Payable,  shows  the 
amounts  of  all  vouchers. 

The  lines  in  the  voucher  register  are  numbered,  and 
the  numbers  are  transferred  to  the  vouchers,  as  the  latter 
are  recorded.  After  record,  the  invoices  are  folded  in 
the  voucher  jackets,  and  placed  in  a  clip  or  file,  in  the 
order  of  their  maturity — those  maturing  first  being  at 
the  top. 

When  an  invoice  is  to  be  paid,  the  voucher  jacket 
is  taken  out  of  the  clip  and  sent,  with  the  check  or  draft, 
to  the  payee.  The  latter  is  expected  to  fill  in  a  blank 
receipt  printed  on  the  voucher  jacket,  and  return  it. 
On  the  return  of  the  voucher  jacket,  it  is  placed  in  a 
file  in  numerical  order  with  the  other  receipted  vouchers. 
The  invoice  is  placed  in  a  separate  file,  that  contains 
all  the  invoices  from  the  given  firm. 

By  this  means,  the  unpaid  invoices  are  always  before 
the  bookkeeper  in  the  order  of  their  maturity,  and  re- 
ceipts for  paid  invoices  can  be  referred  to  by  number. 
There  is  a  separate  file  for  each  trade  creditor,  where 
the  invoices  themselves  are  kept,  and  where  they  are 
easily  accessible. 

When  the  invoices  are  not  numerous,  the  same  prac- 
tical result  may  be  secured  by  stamping  on  the  invoice 
itself,  the  form  for  the  voucher  description  required, 
and  handling  the  invoice  in  like  manner  as  a  voucher 
jacket  is  handled. 

The  vouchers  payable  register  is  footed,  ruled  and 
posted  monthly.  The  several  totals  of  the  charge  col- 
umns are  posted  to  the  debit  of  the  ledger  accounts,  and 
the  credit  column  total  to  the  credit  of  Vouchers  Pay- 
able. The  Vouchers  Payable  account  is  equivalent  to 
Accounts  Payable,  as  the  latter  is  kept  when  the  voucher 
system  is  not  used.  When  a  voucher  system  is  used, 
the  cash  book  requires  a  column  on  the  paying  side  for 
Vouchers  Payable.  Thus,  in  Form  16  I,  the  heading  of 
« .In inn  No.  17,  Accounts  Payable,  would  be  changed  to 
Vouchers  Payable. 


BOOKKEEPING— The  Inventory  Book   ( 77-77  D)  153 

77.  The  Inventory  Book  presents  a  record  of  all 
floating  assets  and  liabilities  under  the  dates  when  taken. 
In  a  small  business,  inventories  may  be  listed  in  the  jour- 
nal, but  in  an  extensive  business,  a  separate  book  is 
necessary,  because  of  the  page  space  required  to  list  a 
large  stock  of  merchandise,  also  because  if  kept  in  a 
separate  book,  inventories  for  different  fiscal  periods  are 
easily  accessible  for  comparison. 

In  making  the  inventories,  both  assets  (Prin.  77  B) 
and  liabilities  (Prin.  77  C)  are  considered. 

77  B.  Among  asset  inventories,  the  most  important 
is  that  of  merchandise  in  stock,  which  is  entered,  as  shown 
in  Form  4H,  to  show  the  quantity  and  value. 

In  a  manufacturing  business,  a  list  of  materials  in 
stock,  to  be  used  in  manufacturing,  is  likewise  entered 
in  the  inventory  book,  to  show  quantity  on  hand,  and 
value. 

It  frequently  happens  that  material  or  labor  not 
consumed,  that  has  been  bought  and  charged  to  expense, 
is  carried  over  from  one  fiscal  period  to  the  next.  This, 
if  of  considerable  value,  should  be  entered  as  an  expense 
inventory. 

Interest  earned  by  the  business,  but  not  yet  paid, 
should  also  be  entered  in  the  inventory  book,  to  show 
the  amount  accrued,  which  is  a  part  of  the  earnings  for 
the  period. 

Any  other  accrued  earnings  of  the  business,  which 
have  not  been  entered,  but  which  have  an  asset  value, 
should  be  listed  in  the  inventory  book. 

The  total  asset  inventories  are  shown  in  a  journal 
entry  (see  Form  14  D)  charging  Inventory  account,  by 
items,  for  the  entire  amount,  and  crediting  Trading  ac- 
count for  merchandise ;  Materials  account,  for  materials ; 
Expense  account,  for  value  remaining  that  had  been 
previously  charged  to  expense;  and  Interest  account,  for 
interest  earned  and  included  in  the  inventory. 

77  C.  Liability  Inventories  consist  of  unrecorded 
amounts  to  be  paid,  accrued  at  the  close  of  the  fiscal 


154  BOOKKEEPING— Primary  Books   (78) 

period.  These  should  likewise  be  entered  in  the  inven- 
tory book.  Among  them,  are  interest  accrued  on  bills 
payable,  and  wages  earned  by  employes  but  not  paid. 
The  purpose  of  entering  these  in  the  liability  inventory 
is  to  keep  an  account  of  the  losses  assignable  to  the 
given  fiscal  period,  even  though  they  have  not  been  paid. 

The  total  liability  inventories  are  shown  by  a  jour- 
nal entry  charging  Interest,  Expense,  or  whatever  titles 
would  be  charged  had  the  items  owed  been  paid,  and 
crediting  Liability  Inventory  account,  by  items.  (See 
Form  14  N,  transferred  to  14  D.) 

77  D.  Depreciation  is  taken  into  account  at  the 
time  the  inventories  are  entered.  A  record  of  the  amount 
and  percentage  of  depreciation  may  appear  with  the 
other  items,  in  the  inventory  book. 

The  amounts  of  depreciation  are  shown  by  a  journal 
entry  charging  the  proper  business  account,  and  credit- 
ing Reserve  for  Depreciation.  (See  Form  14  N  trans- 
ferred to  14  D.) 

78.  Primary  Books  and  Records.  When  several 
persons  are  doing  the  bookkeeping  work  in  a  single 
office,  it  is  generally  necessary  to  divide  the  work  of 
making  primary  entries  among  assistants,  each  one  re- 
cording a .  certain  variety  of  transactions  belonging  to 
his  division  of  the  work.  These  divisional  records  are 
made  in  primary  books,  so  arranged  that  the  aggregate 
results  of  the  transactions  recorded  in  any  one  book 
may  be  summarized  on  tickets  for  the  head  bookkeeper, 
who  transfers  the  entries  from  the  tickets  to  the  posting 
books. 

Primary  records  should  be  distinguished  from  aux- 
iliary records.  The  former  contain  records,  the  totals  of 
which  are  carried  to  the  posting  books ;  the  latter,  certain 
information,  records,  etc.,  that  are  not  posted. 

The  primary  books  are,  to  a  large  extent,  ruled  and 
printed  to  suit  the  business  when-  used,  new  forms  being 
made  as  needed.  They  are  necessary  in  every  large  office. 
In  a  bank,  the  following  primary  books  are  needed: 


BOOKKEEPING— Primary  Books   (78)  155 

(1).  Individual  ledger,  in  which  the  individual  book- 
keeper enters  the  deposits  and  checks  and  extends  cus- 
tomers' totals.  At  the  close  of  the  day  he  passes  to  the 
head  bookkeeper  tickets  crediting  Deposits  for  the  total 
of  the  day's  deposit  slips,  and  charging  Deposits  for 
the  total  of  the  day's  checks.  (2).  Loan  and  discount 
register,  in  which  the  discount  clerk  records  all  paper 
discounted  by  the  bank.  At  the  close  of  the  day,  he 
passes  to  the  head  bookkeeper,  tickets  charging  Loans, 
Discounts,  and  Accrued  Interest,  and  crediting  Discount. 
(3).  Draft  register,  in  which  the  draft  clerk  enters  the 
record  of  drafts  sold.  Tickets  are  made  crediting  the 
drawee  banks  for  the  totals  of  drafts  sold ;  and  Exchange 
for  the  total  of  exchange  collected  from  sale  of  drafts. 
(4).  Remittance  register,  in  which  the  remittance  clerk 
enters  all  drafts  and  checks  cashed  during  the  day, 
which  are  sent  to  correspondent  banks  for  credit.  He 
passes  to  the  head  bookkeeper  tickets  charging  the  banks 
to  which  remittance  is  made.  (5).  Collection  register, 
in  which  the  collection  clerk  enters  the  paper  left  for 
the  bank  to  collect.  As  he  collects  the  items,  he  makes 
separate  tickets  crediting  the  persons  for  whom  col- 
lected, (if  a  depositor,  through  the  individual  ledger,  if 
an  out-of-town  person,  through  the  draft  register)  also  a 
ticket  crediting  Collection. 

A  local  agent  of  a  railroad  company  makes  the  re- 
cords pertaining  to  his  office  in  primary  books  and  forms, 
among  them,  the  local  cash  book,  freight  forwarded  book, 
freight  received  book,  ticket  summary  book,  etc.  Re- 
ports or  abstracts  from  these  books  are  forwarded  to 
the  general  offices  of  the  company,  and  from  these  the 
general  books  are  compiled. 

In  the  manufacturing  business,  the  various  elements 
of  cost  entering  into  the  product  as  a  whole,  or  by  the 
piece,  are  collected  on  various  primary  forms,  and  books, 
as  the  work  progresses.  The  final  results  or  general 
totals,  of  these  daily  records  are  to  be  transferred  to 
and  charged  in  the  posting  books. 


156  BOOKKEEPING— Auxiliary  Books   (79) 

In  a  retail  store,  the  cash  sales  are  given  a  primary 
record  in  cash  registers  and  sales  sheets,  from  which  the 
aggregates  are  carried  to  the  cash  book. 

A  traveling  salesman  makes  primary  records  of  his 
expenses  in  a  pocket  expense  book,  from  the  total  of 
which  a  ticket  is  made  for  entry  in  the  office  cash  book 
or  journal. 

From  the  above  samples,  it  is  readily  seen  that  all 
primary  books  should  be  preserved  as  a  part  of  the  re- 
cords of  the  office,  accessible  to  the  auditor. 

79.  Auxiliary  Books  are  books  containing  records 
and  reminders  to  aid  in  the  conduct  of  the  business,  but 
nothing  that  is  to  be  posted.  They  thus  have  no  articu- 
lation with  the  posting  books,  and  can  be  added  to  or 
dropped  from  an  office  system  when  desired.  Some 
common  auxiliary  books  are  mentioned: 

The  bills  receivable  book  contains  a  description  of 
notes  and  accepted  bills  of  exchange  received.  Each 
item  is  given  a  writing  line  in  this  book.  Vertical  col- 
umns allow  for  description,  usually  consisting  of  the 
date  received,  number,  maker's  name,  payer's  name, 
date  of  note,  time  of  note,  date  due,  amount,  interest 
rate,  and  a  final  column  in  which  to  enter  disposition. 
The  number  in  the  bill  book  is  written  on  the  note,  and 
the  note  is  thereafter  referred  to  by  number.  This 
book  exhibits,  in  compact  form,  the  information  about 
all  notes  held  by  the  concern.  Where  notes  are  re- 
ceived only  at  intervals,  there  is  no  very  good  reason 
for  connecting  this  book  with  the  posting  books,  as  the 
posting  cnlt-ii -s  can  be  made  direct  from  the  transactions, 
and  tin-  bill  book  record  made  at  convenience.  But 
when  notes  are  received  actively,  it  is  better  to  make 
tli is  n  primary  rather  than  an  auxiliary  book  and  trans- 
!•  r  tin-  charge  to  Bills  Receivable  from  it  by  daily 
totals,  as  in  the  case  of  tlie  loan  and  discount  register. 
IVin.  78.)  Wlii-n  tin-  rolL-d  ions  from  paynx-nl  of 
notes  are  very  active,  tin-  credits  of  Bills  Receivable  may 
be  posted  to  the-  bill  book  from  tho  rash  book,  thus  mak- 


BOOKKEEPING— Auxiliary  Books   (79)  157 

ing  the  bills  receivable  book  a  subsidiary  ledger,  called 
the  note  ledger.  Thus  the  relation  of  the  bills  receivable 
book  to  the  entire  bookkeeping  system  is  that  of  an 
auxiliary  book,  a  primary  book,  or  a  subsidiary  ledger, 
depending  upon  the  conditions. 

The  bills  payable  book  is  similar  to  the  bills  re- 
ceivable book  and  is  governed  by  the  same  considera- 
tions. 

A  tickler  is  a  book  subdivided  into  spaces,  each  space 
to  contain  memoranda  of  the  maturities  payable  or  re- 
ceivable on  a  given  date.  The  spaces  are  dated,  begin- 
ning with  January  1,  January  2,  etc.,  and  extend  through 
the  entire  year.  A  memorandum  of  a  note  or  other 
obligation  due  in  a  future  date,  is  placed  in  the  space 
reserved  for  that  date.  Maturities  receivable  may  be 
written  in  black  ink  and  maturities  payable  in  red  ink, 
to  distinguish  them.  This  book  is  merely  a  reminder 
to  refer  to,  once  a  day,  in  order  that  no  collection  or 
payment  may  be  overlooked.  When  the  items  are  at- 
tended to,  they  may  be  checked  off. 

A  very  practical  form  of  tickler  for  use  when  the 
items  of  any  one  day  are  not  very  numerous,  consists  of 
a  chart,  ruled  in  twelve  vertical  columns,  and  thirty-one 
horizontal  lines.  The  vertical  columns  should  be  headed 
by  the  months  beginning  with  January,  ending  with 
December.  The  lines  should  be  numbered  1,  2,  3,  etc., 
to  31,  to  allow  one  line  on  the  page  for  each  day  of  the 
month.  Reminders  for  given  dates  during  the  year  can 
be  written  in  at  the  intersection  of  the  lines  and  the  ver- 
tical columns;  thus  a  reminder  for  April  10,  would  be 
written  where  fourth  vertical  column  crosses  the  tenth 
horizontal  line. 

The  Advertising  list  is  a  book  containing  addresses 
of  prospective  or  regular  customers,  with  information 
about  them,  to  whom  advertising  matter  is  sent.  The 
addresses  are  arranged  in  such  a  book,  on  the  scheme 
of  classification,  either  by  surnames  or  towns,  alpha- 
betically arranged  throughout  the  entire  list,  or  ar- 


158  BOOKKEEPING— Business  Forms   (80-80  C) 

ranged  by  states,  or  by  other  geographical  sections. 
Such  lists  must  be  constantly  revised,  by  adding  new 
addresses,  and  by  dropping  off  addresses  of  undesirable 
firms.  Care  in  keeping  this  .list  correct  and  reliable  is 
usually  appreciated  by  any  business  manager. 

The  customers'  liability  ledger  is  an  auxiliary  book 
in  which  a  credit  man  enters  such  information  as  comes 
to  him  concerning  the  debts  already  contracted  by  cus- 
tomers. The  facts  therein  recorded  are  of  value  to  him 
in  determining  the  amount  of  credit  to  be  allowed  in 
future  dealings. 

There  are  many  kinds  of  auxiliary  books.  Their 
scope  and  general  purpose  may  be  gathered  from  the 
foregoing  examples. 

80.  Business  Forms  are  the  papers,  partly  printed 
and  partly  written,  that  pass  among  business  men,  in 
the  course  of  their  transactions.  When  these  papers 
supply  the  evidence  of  the  transactions,  they  are  called 
vouchers.  Entries  in  the  books  are  mostly  based  on 
these  forms.  Whenever  possible,  vouchers  should  be  filed 
for  future  reference. 

SOB.  Bank  Depositor's  Forms.  Form  15  A.  When 
a  depositor  opens  an  account  with  a  bank,  he  is  required 
to  write  his  signature  in  a  book  provided  for  the  purpose, 
called  a  Signature  Book.  Signature  Cards  are  also  used 
by  banks  for  the  same  purpose.  Depositor's  signatures 
are  kept  where  the  paying  teller  may  quickly  refer  to 
them  for  comparison  with  the  signatures  on  the  deposi- 
tor's checks,  when  the  checks  are  presented  for  payment. 
A  depositor  should  write  his  name  in  his  ordinary,  plain 
hand  writing  without  attempt  at  peculiarity  in  style. 
In  signing  his  checks  he  should  make  no  variation  in  the 
form  of  his  signature.  While  a  teller  is  responsible  to 
the  depositor  for  the  genuineness  of  the  signature  on 
the  checks  which  he  pays,  the  depositor  is  responsible 
for  delays  or  losses  occasioned  by  signing  checks  in  an 
unusual  form  or  handwriting.  A  teller  is  justified  in 
r.-t'iisinsr  a  cln-ck.  rvm  though  genuine,  when  the  signa- 


BOOKKEEPING— Business  Forms   (80-80  C)  159 

ture  shows  any  material  variation  from  the  signature 
as  filed  with  the  bank.  A  model  form  of  signature  card 
is  given  in  Form  15  A. 

Form  15  B.  Deposit  Tickets  are  provided  by  the 
banker.  On  these  the  depositor  enters  the  amount  to 
be  deposited.  On  making  a  deposit,  the  bills  should  be 
face  side  up,  all  bills  of  the  same  denomination  being 
placed  together.  Coin  in  any  quantity  should  be  brought 
in  a  sack.  The  deposit  ticket  and  the  currency  are 
passed  to  the  teller.  The  form  shows  the  deposit  made 
up  of  currency,  coin,  and  other  cash  items.  When  a 
great  many  items  are  included  in  a  deposit,  bankers  pre- 
fer, and  sometimes  insist,  that  they  be  entered  on  the 
ticket  in  considerable  detail. 

Form  15  C.  On  receipt  of  the  first  deposit,  the  teller 
opens  a  Depositor's  Pass  Book,  which  he  delivers  to  the 
depositor.  This  is  a  book  to  be  carried  by  the  depositor, 
and  presented  by  him  to  the  bank  teller  with  his  deposits. 
The  teller  enters  each  deposit  in  this  book,  when  made, 
in  the  proper  columns  to  show  the  date,  explanation  and 
amount.  This  book  serves  the  depositor  as  receipts, 
from  the  bank,  for  the  amounts  deposited. 

Formerly,  it  was  the  custom  among  banks  to  enter 
the  deposits  on  the  left  page  of  the  pass  book,  as  above 
explained,  reserving  the  right  page  for  the  entries  of 
paid  checks,  written  in  the  pass  book  by  the  bank  book- 
keeper, when  the  pass  book  was  left  at  the  bank  to  be 
balanced,  usually  at  the  end  of  the  month.  After  enter- 
ing the  checks,  the  bank  bookkeeper  balanced  the  pass 
book,  ruled  it,  and  carried  the  balance  down;  then  re- 
turned the  book  with  the  cancelled  checks  to  the  deposi- 
tor. This  custom  yet  prevails  in  many  banks. 

At  present,  commercial  banks  find  it  more  satis- 
factory to  render  monthly  statements  (see  Form  15  G) 
to  depositors,  without  any  reference  to  the  bank  pass 
book,  so  that  it  is  not  necessary  for  the  depositor  to 
leave  his  book  at  the  bank  to  be  "written  up,"  as  for- 
merly. When  the  statement  method  is  in  use,  the  bank 


160  BOOKKEEPING— Business  Forms   (80-80  C) 

pass  book  is  merely  the  teller's  memoranda  of  deposits 
to  be  carried  by  the  depositor. 

Forms  15  D  and  15  E.  Check  Books  are  usually 
supplied  to  the  depositor  by  the  bank.  They  may  con- 
tain from  twenty  to  several  hundred  checks,  with  one 
or  several  checks  to  the  page.  At  the  left  of  each  check 
is  the  stub,  which  is  separated  from  the  check  at  a  per- 
forated line,  and  remains  in  the  book  after  the  check  is 
detached.  A  very  good  form  of  check  stub  is  illustrated 
in  Form  15  D,  in  which  the  first  deposit,  $1000,  is  en- 
tered by  the  depositor  in  the  space  provided  for  that 
purpose.  The  record  of  the  first  check  drawn  is  written 
on  the  stub,  and  the  amount  deducted  from  the  deposit 
shows  a  balance  of  $970,  carried  forward. 

Stub  No.  2  (Form  15  E)  shows  the  balance  carried 
from  Stub  No.  1,  and  a  second  djeposit  of  $50.25,  making 
a  total  of  $1020.25.  From  this  amount,  check  No.  2  is 
deducted,  leaving  a  balance  of  $856.05  to  be  carried  for- 
ward to  the  third  stub,  so  continuing.  Thus,  when  a 
check  is  to  be  written,  the  balance  remaining  in  the 
bank  is  always  shown  on  the  last  stub. 

In  some  check  books,  the  stubs  are  interleaved  al- 
ternately with  the  checks.  In  check  books  of  this  form, 
there  is  more  space  on  the  stubs  for  figuring. 

Form  15  F.  Checks  or  drafts  when  taken  to  the 
bank  for  deposit,  or  when  transferred  to  other  holders, 
must  be  endorsed.  For  endorsements  transferring  title, 
five  different  forms  are  given.  Of  the  transfer  endorse- 
ments, No.  1  is  called  an  "endorsement  in  blank;"  No. 
2,  an  " endorsement  in  full;"  No.  3,  an  "endorsement 
without  recourse;"  No.  4,  a  "restrictive  endorsement;" 
No.  5,  an  "endorsement  for  deposit."  The  last  named 
form  would  be  used  in  endorsing  the  checks  included  in 
a  deposit,  although  the  first  form  is  frequently  used. 

Note. — The  two  endorsements  to  the  right  of  the 
form  apply  to  notes. 

Form  15  O.  At  the  close  of  the  month,  the  bank 
bookkeeper  renders  to  the  depositor  a  statement  of  his 


BOOKKEEPING— Business  Forms  (80-80  C)  161 

checking  account,  and  returns  with  the  statement  the 
depositor's  paid  and  cancelled  checks.  In  the  form 
referred  to,  two  columns  are  reserved  for  the  entry  of 
checks,  and  one  column  for  deposits.  The  check  col- 
umns show  the  date  paid  and  the  amounts  of  the  checks. 
The  checks  are  entered  in  numbered  lines,  so  that  the 
statement  readily  shows  how  many  checks  are  paid  dur- 
ing the  month.  The  model  shows  forty-five  checks 
charged;  hence  the  bank  bookkeeper  must  return  that 
number  of  vouchers  (cancelled  checks). 

The  deposits  are  entered  in  a  column  to  the  right. 
These  entries  should  agree  with  the  entries  made  by  the 
teller  in  the  depositor's  pass  book.  (See  Form  15  C.) 

After  entering  all  checks  and  deposits  on  the  state- 
ment, the  bank  bookkeeper  enters  the  total  of  deposits  at 
the  foot  of  the  statement,  and  the  total  of  checks  below. 
The  difference  between  these  amounts  is  the  balance 
remaining  to  the  depositor's  credit. 

Form  15  H.  Persons,  in  transferring  funds  from 
one  city  to  another,  find  it  convenient  to  do  so  by  re- 
mitting bank  drafts.  Any  local  bank  will  sell  a  draft 
drawn  on  its  correspondent,  payable  at  par  in  any  part 
of  the  country. 

The  form  illustrates  a  draft  drawn  by  a  bank  in 
North  Platte,  Nebr.,  on  a  bank  in  New  York  City.  This 
draft,  under  ordinary  conditions,  may  be  cashed  in  any 
city  in  the  United  States  at  par.  The  bank  cashing  it 
will  remit  it  to  New  York  for  credit.  Local  banks  sell 
drafts  on  banks  in  the  different  large  cities.  It  is  cus- 
tomary to  purchase  drafts  payable  in  the  large  city 
nearest  the  point  remitted  to. 

Persons  buying  bank  drafts  may  instruct  the  banker 
to  make  the  draft  payable  to  their  own  order  or  to  the 
order  of  the  person  to  whom  they  make  remittance.  It 
is  a  very  good  plan  to  have  the  draft  made  payable  to 
the  purchaser's  order.  In  that  case,  before  sending  it, 
the  purchaser  must  endorse  it.  The  form  of  endorsement 
to  use  is  shown  on  Form  15  F,  second  endorsement. 


162  BOOKKEEPING — Business  Forms  ( 80-80  C) 

Banks  charge  exchange  on  the  drafts  sold.  Rates 
differ,  but  are  based  on  the  amount  of  the  draft.  Many 
banks  charge  ten  cents  exchange  on  every  hundred 
dollars. 

Note. — Post  office  money  orders  and  express  orders 
serve  the  same  purpose  as  bank  drafts,  for  limited 
amounts. 

Form  15 1.  Business  men,  when  temporarily  in  need 
of  funds,  regularly  apply  to  their  banker  for  loans  or 
discounts.  It  is  a  principal  service  of  a  bank  to  loan 
money  to  those  whose  credit  is  good.  When  taking  a 
loan  or  discount  the  borrower  delivers  a  note  payable  to 
the  bank. 

The  form  illustrates  a  note  given  to  a  certain  bank. 
The  note  does  not  draw  interest  until  after  maturity,  the 
form  indicating  that  the  payment  for  the  use  of  the 
money  from  date  of  maturity  is  in  the  form  of  a 
discount  deducted  from  the  amount  that  the  banker 
passes  to  the  borrower.  Assuming  that  the  interest  for 
sixty  days  is  $20,  the  banker  would  discount  the  note 
by  deducting  $20  from  the  face,  and  pass  $1980  to  the 
customer.  At  the  end  of  sixty  days  the  customer  would 
pay  $2000  in  settlement. 

If  the  interest  clause  in  the  note  read  "with  interest 
from  date,"  instead  of  "with  interest  from  maturity, " 
the  form  of  the  note  would  indicate  a  loan.  In  that 
case,  the  customer  would  receive  full  face  when  the  note 
was  delivered,  and  pay  face,  plus  interest,  at  maturity. 

Form  15  J.  Occasions  arise  when  it  is  desirable  to 
leave  a  certain  amount  of  money  on  deposit,  not  subject 
to  check,  but  withdrawable  in  one  amount  by  the  de- 
positor, or  on  his  order.  When  money  is  left  in  this 
way,  it  is  customary  for  the  banker  to  issue  to  the  de- 
positor a  Certificate  of  Deposit. 

The  form  illustrates  a  certificate  of  deposit  issued  by 
a  certain  bank  to  Henry  S.  Miller,  who  may  return  it 
with  endorsement,  and  receive  the  amount  stated,  or  he 


BOOKKEEPING — Business  Forms  ( 80-80  C)  163 

may  endorse  the  certificate  to  another  person,  who  can 
cash  it. 

Form  15  K.  The  payee  of  a  check  sometimes  de- 
mands special  assurance  that  the  check  will  be  paid  when 
presented  to  the  bank.  This  assurance  may  be  given 
by  having  the  check  certified  by  the  banker.  The  form 
illustrates  a  Certified  Check.  This  check  has  been  pre- 
sented to  the  bank  teller  who  has  written  across  the  face 
a  certification  obligating  the  bank  to  pay  the  check 
whenever  properly  presented. 

Form  15  L.  When  depositors  discount  their  cus- 
tomers'  notes  and  acceptances  at  a  bank,  a  discount 
ticket  is  used.  The  items  should  be  entered  so  as  to 
show  amounts  and  net  proceeds,  as  illustrated  in  the 
form. 

80  C.  Miscellaneous  Business  Forms.  Following 
are  described  a  number  of  business  forms  that  are  in 
general  use: 

Form  15  N.  The  Order  Blank  is  a  form  used  by 
dealers  in  ordering  goods.  A  book  of  order  blanks 
should  contain  duplicates  as  well  as  original  orders. 
"When  the  original  is  sent,  the  duplicate  is  kept  for  refer- 
ence, as  a  reminder  in  case  the  order  is  not  filled 
promptly;  and  later,  to  be  compared  with  the  goods 
received.  Order  blanks  should  be  numbered  consecu- 
tively as  a  means  of  ready  reference  in  correspondence. 

Form  15  0.  The  Invoice  or  Bill  is  sent  by  the  seller 
to  the  buyer  at  the  time  an  order  for  merchandise  is 
filled.  On  it  are  listed  the  items  sold,  the  prices  and 
the  amount.  On  the  form  are  written  the  customers7 
ledger  page  (for  the  convenience  of  the  seller),  the  route 
by  which  the  shipment  was  made,  and  the  terms.  The 
buyer,  on  receiving  an  invoice,  should  check  the  items 
carefully  with  the  merhandise  received,  and  with  his 
order  to  note  discrepancies  in  articles,  quantity,  or  errors 
in  prices  or  extensions. 


164  BOOKKEEPING— Business  Forms  (80-80  C) 

Form  15  P.  A  Statement  of  Account  is  usually  ren- 
dered to  the  customer  on  the  first  of  the  month,  from  the 
ledger  account.  The  form,  a  statement  for  December, 
shows  a  balance  of  $250.19  carried  over  from  November. 
To  this  are  added  the  sales  made  to  the  customer  during 
the  month  closed,  the  total  debit  being  carried  to  the  sec- 
ond column.  Below  are  entered  the  customer's  credits 
as  they  appear  in  the  account,  the  total  credits  being  also 
carried  to  the  second  column,  where  they  are  subtracted 
from  the  debit  total,  showing  $493.14,  the  amount  due. 

The  receipt  at  the  bottom  of  the  statement,  written 
on  a  subsequent  date,  shows  that  the  customer  made  full 
payment  on  Jan.  9. 

Form  15  Q.  This  is  a  form  of  account  sales,  which  is 
a  statement  or  report  sent  by  the  commission  firm  (Con- 
rad Schopp  &  Co.)  to  the  consignor  (A.  A.  Kuhl  &  Co.) 
of  merchandise  sent  for  sale  on  the  market. 

The  commission  firm  undertakes  to  sell  at  market 
prices  goods  consigned  to  it,  and  to  remit  to  the  con- 
signor the  proceeds  from  the  sales  after  taking  out  dif- 
ferent charges  for  services  in  effecting  the  sales. 

The  form  shows  that  forty-nine  barrels  of  cranberries 
have  been  sold  for  the  consignor  in  four  lots  amounting 
in  all  to  $278.40.  The  commission  merchants'  charges  are 
entered  in  detail,  amounting  to  $24.89,  leaving  $253.51, 
net  proceeds,  due  the  consignor. 

Form  15  R  is  a  common  form  of  receipt.  It  shows 
that  Henry  T.  Miller,  being  indebted  to  C.  M.  Hunter,  has 
paid  $10.65  of  the  debt,  and  that  Mr.  Hunter  acknowl- 
edges this  payment.  The  form  shows  the  receipt,  with 
the  accompanying  stub,  before  the  receipt  is  removed 
from  Mr.  Hunter's  receipt  book. 

That  portion  of  the  form  to  the  left  of  the  receipt  is 
called  the  "stub."  It  supplies  the  makrr  of  the  receipt 
with  a  record  of  the  date,  amount,  to  whom  given,  and 
purpose  of  the  receipt. 

At  the  time  of  writing  a  receipt,  always  fill  out  the 
stub  before  removing  the  receipt  from  the  book. 


BOOKKEEPING— Business   Forms   (80-80  C)  1C..", 

A  receipt  is  a  written  acknowledgement  that  the 
maker  has  received  into  his  possession  money  or  other 
property  from  the  person  to  whom  the  receipt  is  given. 

A  receipt  should  always  be  required  when  money  is 
paid  on  account,  and  the  receipt  should  state  clearly  the 
purpose  of  the  payment.  Receipts  should  be  carefully 
filed  and  never  destroyed  until  there  is  no  longer  any 
possibility  that  they  may  be  wanted. 

Note. — A  receipt  form  like  the  one  illustrated  is  fre- 
quently not  necessary.  In  Form  15  P,  the  payment  of  the 
account  is  receipted  on  the  statement.  Invoices  (see 
Form  15  0)  are  often  receipted  in  like  manner.  A  check 
returned  from  the  bank  with  the  endorsement  of  the 
payee  is  a  receipt  for  the  amount  of  the  check,  although 
not  a  receipt  for  the  payment  of  a  specified  obligation. 

Form  15  S.  A  promissory  note  is  a  written  promise 
to  pay  a  stated  sum  of  money  at  a  specified  time. 

The  original  parties  to  a  note  are  the  Maker,  or  party 
who,  by  the  act  of  signing  the  note,  makes  the  promise; 
and  the  Payee,  or  the  party  to  whom  the  note  is  made 
payable. 

The  form  illustrates  a  standard  promissory  note  and 
its  stub  properly  filled  out.  In  entering  the  amount  on 
a  note  the  same  care  should  be  observed  to  prevent  "rais- 
ing" or  other  alteration  as  in  the  case  of  a  check. 

In  business,  notes  are  usually  made  payable  at  a 
bank  which  is  specified  in  the  note.  In  the  absence  of 
such  specification,  the  law  makes  a  note  payable  at  the 
legal  residence  of  the  maker. 

Form  15  T  and  15  U.  Drafts  are  used  to  adjust  ac- 
counts without  the  transmission  of  money.  If  J.  C. 
Rogers  owes  the  student  $75,  and  H.  C.  Preston  owes  J. 
C.  Rogers,  the  latter  firm  can  draw  on  Preston  payable 
to  the  Student,  and  the  payment  of  this  draft  will  adjust 
the  several  accounts.  When  the  draft  is  made  payable 
at  sight  or  on  demand,  the  drawee  is  expected  to  pay  the 
draft  when  first  presented. 


166  BOOKKEEPING — Business  Forms  ( 80-80  C) 

Form  15  T  is  a  draft  drawn  at  thirty  days  sight, 
meaning  thirty  days  after  sight,  and  it  should  be  pre- 
sented to  Preston  as  soon  as  possible,  for  acceptance. 
To  accept  this  draft,  Preston  should  write  across  the  face 
of  the  draft  the  word  "Accepted,"  the  current  date,  and 
his  signature.  The  draft,  after  Preston  has  accepted  it, 
is  called  an  acceptance.  (See  Form  15  U.) 

Commercial  drafts  are  commonly  used  as  a  means  of 
making  collections  from  distant  firms  through  the  agency 
of  a  bank.  In  this  case,  the  drawer  makes  out  the  draft 
payable  to  the  order  of  "Myself,"  or  "Ourselves,"  and 
endorses  the  draft  in  favor  of  the  bank  "for  collection," 
or  he  makes  the  draft  payable  directly  to  the  -collecting 
bank,  who  forwards  it  for  payment  or  acceptance. 

Goods  are  often  paid  for  with  the  buyer's  aeceptance 
at  the  time  of  purchase,  the  acceptance  in  such  case  being 
used  in  place  of  a  promissory  note. 

If,  upon  the  presentation  of  a  draft,  the  drawee 
declines  either  to  pay  it  or  accept  it,  the  draft  is  said  to 
be  dishonored.  In  the  case  of  a  refusal  to  pay  an  ac- 
ceptance it  should  at  once  be  protested,  as  in  the  case  of 
a  refusal  to  pay  a  promissory  note. 

Form  15  V.  When  a  shipper  delivers  merchandise  to 
a  transportation  company  for  shipment,  he  usually  brings 
a  shipping  book,  or  a  set  of  loose  sheets,  describing  the 
shipment  in  triplicate.  The  printed  matter  is  different 
on  each  of  the  three  sheets,  but  the  blank  spaces  to  be 
filled  in  by  the  shipper  are  the  same  in  each  form,  so 
that  the  set  may  be  completed  in  one  writing  by  using 
carbon  sheets. 

The  interstate  commerce  commission  has  prescribed 
a  form,  to  be  used  by  all  common  carriers,  called  a  Bill 
of  Lading.  The  original  copy  is  a  shipping  order  that  is 
kept  by  the  transportation  company.  The  two  duplicates 
are  signed  by  the  agent  of  the  transportation  company, 
the  first  being  a  bill  of  lading  which  is  sent  to  the  con- 
signee, and  the  second  being  a  memorandum  of  the  bill  of 
lading  which  is  kept  by  the  shipper. 


BOOKKEEPING— Filing  System   (81)  167 

The  form  represents  a  set  of  shipping  bills  filled  out 
by  Cyrus  Martin,  the  signature  of  the  transportation 
agent,  A.  H.  Hooper,  being  written  on  the  bill  of  lading 
and  memorandum. 

Form  15  W  illustrates  a  stock  certificate  issued  to 
Martin  Goldman  by  the  American  Steel  Corporation,  as 
evidence  that  Mr.  Goldman  owns  fifty  shares  of  the  capi- 
tal stock  of  that  company.  To  the  left  is  the  stub,  on 
which  are  recorded  the  essential  facts  about  its  issuance, 
and  at  the  bottom  Mr.  Goldman's  receipt  for  the  certi- 
ficate. In  this  instance,  the  shares,  now  in  possession  of 
Mr.  Goldman,  were  owned  by  H.  B.  Rogers,  who  sold  the 
stock  to  Mr.  Goldman.  When  one  shareholder  transfers 
his  shares  to  another,  it  is  generally  necessary  for  the 
seller  of  the  shares  to  surrender  his  certificate  to  the 
company.  The  company  then  issues  a  new  certificate  to 
the  buyer  of  the  shares.  This  is  called  a  transfer  "on 
the  books"  of  the  corporation. 

81.  A  Filing  System  should  be  adopted  with  a  view 
to  several  considerations,  some  of  which  are  frequently 
overlooked.  It  should  be  such  that  (1)  papers  may  be 
quickly  and  easily  filed;  (2)  that  they  may  be  quickly 
and  easily  located  and  found;  (3)  the  whole  scheme 
should  be  on  a  plan  to  permit  of  expansion  for  future 
needs,  without  disarrangement  of  present  methods. 

The  easiest  way  to  take  care  of  vouchers  is  to  number 
them  serially  from  the  record  books,  and  file  them  by 
number.  However,  there  is  a  very  good  reason  for  not 
filing  invoices  by  number.  Most  business  men  find  it 
better  to  have  all  invoices  from  a  given  firm  in  one  binder 
or  folded,  so  that  comparison  of  past  prices,  terms,  etc., 
can  be  made.  If  the  invoices  are  thus  filed,  there  remain 
the  expense  vouchers  and  the  cancelled  checks  to  file. 

All  entries  to  Expense  should  be  supported  by  some 
bill,  receipt,  or  ticket.  These  can  very  well  be  given  ex- 
pense voucher  numbers  from  the  books  of  entry,  and  filed 
in  numerical  order.  A  box  of  the  proper  dimensions  to 
allow  them  to  stand  side  by  side,  will  hold  hundreds  of 


168  BOOKKEEPING— Filing  System   (81) 

them  and  not  take  much  room,  while  it  will  permit  any 
one  of  them  to  be  located  readily. 

Cancelled  checks  may  be  called  for,  months,  or  even 
years,  after  they  have  been  returned  by  the  bank.  It  is 
advisable  to  assort  them  also  by  number,  when  they  are 
returned  by  the  bank,  and  file  them  away  in  this  order. 

It  is  a  good  practice  to  file  all  vouchers  in  their 
places  at  the  close  of  the  day. 


INDEX-COMMENTARY. 


1.  Aii  index  to  topics  in  the  text. 

2.  An  index  to  models  of  books    and    blanks  in  the  Form 
Book. 

3.  A  vocabulary  of  business  words  and  terms,  with  denni- 
nitions  or  comments. 

4.  Standard  abbreviations  and  signs  commonly  used. 

5.  The  rules   for  computing  Interest,   Discount,    Fractional 
Remainders,   etc.,   as  used  in  the  sets   in  the   American 
Bookkeeping  Series. 


170  INDEX-COMMENTARY 

Abatement.  An  amount  deducted  for  overcharge,  damage,  or 
discount,  from  a  sum  payable. 

Abstract  of  Accounts.    Prin.  63  D. 

Abstract  of  Title.    Prin.  68  D. 

Acceptance.  (1)  The  act  of  promising  payment  of  a  draft 
by  the  payee,  usually  effected  by  his  writing  the  word  "Accepted," 
followed  by  his  signature,  across  the  face  of  the  draft.  (2)  The 
name  given  to  an  accepted  paper. 

Account.     (Acct  or  a/c).    Prin.  8. 

Acknowledgment.  An  officially  certified  statement  made  to  a 
notary  public,  or  other  public  officer  with  seal,  affirming  the  volun- 
tary nature  of  some  act  by  the  acknowledger,  which  act  is  speci- 
fied in  the  instrument 

Accommodation  Paper.  Commercial  paper  issued  or  indorsed 
by  one  person  for  the  support  of  another  person's  credit,  and 
without  benefit  to  the  accommodating  party.  Prin.  35  C. 

Accounting.    Prin.  1. 

Accountant.  A  person  who  is  proficient  in  the  rules  and 
practice  governing  the  analysis  of  business  transactions.  A  pub- 
lic accountant  offers  his  services  to  public  patronage  for  a  fee. 
A  certified  public  accountant  is  one  who  has  passed  certain  pre- 
scribed examinations,  and  has  received  a  training  entitling  him  to 
a  certificate  of  proficiency  issued  by  state  authority,  which  cer- 
tificate authorizes  him  to  practice  his  profession  in  the  state 
where  it  is  issued. 

Account  Purchase.  A  detailed  record  of  the  cost  of  pur- 
chases made  by  a  purchasing  agent. 

Account  Sales.  An  itemized  statement  issued  by  a  commis- 
sion firm  to  a  consignor,  showing  the  amounts  realized  from  sales, 
the  expenses  and  the  proceeds. 

Accounts  Payable.    Prin.  31  to  31  C ;  Form  12  H. 

Accounts  Payable  Account.    Prin.  31  D ;  Form  12  G. 

Accounts  Receivable.    Prin.  25  B-25  E ;  Form  11  B. 

Accrued.  Added  by  gradual  increase,  as  the  interest  on  a 
note. 

Adjustment  Entry.  An  entry  made  to  correct  an  error, In  an 
account 

Adjustment  Account.  An  English  equivalent  of  the  American 
term,  "controlling  account." 

Administrator.  A  person  appointed  by  a  court  to  have  in 
charge  the  estate  of  a  deceased  person.  Prin.  68  J. 

Administrative  Expense.    Prin.  57. 

Adventure.  (Adv.)  A  shipment  by  a  merchant  on  his  own 
business  risk,  or  Jointly  with  others;  a  speculation. 

Affidavit.  A  written  statement  under  oath  and  acknowledged 
before  a  proper  officer.  (See  Acknowledgment.) 

Agent.  (Agt)  One  who  represents  another  in  a  business 
transaction.  The  person  represented  is  called  the  principal. 
Prin.  68  F. 

Allowance.  A  deduction  from  a  debt  allowed  to  a  debtor  for 
some  reason  not  considered  when  the  debt  was  made;  an 
abatement. 

Amount.     (A  nit) 


INDEX-COMMENTARY  171 

Amortization.  The  clearing  off  or  extinguishment  of  a  debt, 
usually  by  means  of  a  sinking  fund. 

Annuity.  A  sum  of  money  payable  yearly  for  a  given  num- 
ber of  years,  or  during  life. 

Appraisement.  An  estimation  of  the  value  of  property  by  a 
properly  authorized  person. 

Appreciation.    Prin.  28  B. 

Appurtenance.  Any  minor  property  or  other  thing  of  value, 
pertaining  to  or  dependent  upon  a  property  or  a  business,  as  the 
small  buildings  or  other  improvements  belonging  to  a  lot  or  farm. 

Arbitration.  The  adjustment  of  differences  or  disagreements 
by  a  disinterested  person  or  persons  chosen  by  the  disagreeing 
parties. 

Article.     (Art.) 

Articles  of  Co-Partnership.  The  written  agreement,  or  con- 
tract, governing  the  relations  and  mutual  obligations  of  partners. 

Assistant.     ( Asst. ) 

Assessment.  An  amount  collected  from  stock  holders  by  a 
stock-  company  to  make  good  a  deficit ;  an  apportionment  of  taxes. 

Assessment  Account.  An  account  to  which  are  carried  from 
Profit  and  Loss  as  debits,  the  amounts  assessed  against  the  dif- 
ferent stock  holders. 

Assets.  Prin.  13;  consist  of,  Prin.  22;  Asset  accounts,  Prin. 
21-30. 

Assignment.  A  term  commercially  applied  to  a  transfer  of 
property  in  writing.  Bank  accounts,  mortgage  loans,  and  claims 
of  various  kinds,  accruing,  as,  salary,  growing  crops,  etc.,  are  as- 
signable, and  if  assigned  for  value,  the  assignee  may  collect  or 
possess  them  for  his  own  benefit. 

Assignment  in  Bankruptcy.  The  transfer  of  property  of  a 
bankrupt  assignor  to  the  assignee,  or  person  in  whom  it  is  vested, 
for  the  benefit  of  creditors. 

At.     (@). 

Attachment.    A  legal  seizure  of  property  to  satisfy  debt. 

Audit.  An  examination  of  records  of  account  with  a  view  to 
ascertaining  their  correctness.  Prin.  61-70. 

Auditing.    Prin.  3.     Prin.  61-70. 

Auditor.  A  person  appointed  to  examine  and  verify  records 
and  accounts.  Prin.  61  B. 

Auxiliary  Books.  Books  containing  records  additional  to 
those  made  in  the  posting  books.  Prin.  79. 

Balance.  (Bal.)  The  excess  of  one  side  of  an  account  over 
the  other.  Prin.  8. 

Balance  Sheet.  A  schedule  showing  the  equality  of  assets 
and  liabilities.  Financial  statements,  trial  balances  after  closing, 
or  whenever  the  trial  balance  shows  actual  assets  and  liabilities, 
are  balance  sheets. 

Balancing  an  Account.  An  account  is  balanced  by  entering 
the  difference  on  the  lesser  side,  ruling  and  footing  the  two  col- 
umns, and  carrying  the  difference  below  the  ruling  to  the  side 
which  is  greater. 

Balance  of  Trade.  The  difference  between  the  value  of  ex- 
ports and  imports  for  a  given  country  and  period. 


172  INDEX-COMMENTARY 

Bales,     (bl.) 

Bank,  (bk.)  A  financial  business  that  offers  the  following 
principal  services  to  the  public:  (1)  Safe  keeping  of  money;  (2) 
Checking  accounts ;  (3)  Loans;  (4)  Collections;  (5)  Exchange  or 
the  transmission  of  funds. 

Bank  Check.    Prin.  68  E. 

Bank  Book.  The  book  carried  by  a  depositor  to  contain  the 
banker's  entries  of  deposits  when  made,  and  of  the  depositor's 
checks  paid,  when  such  book  is  balanced  periodically. 

Bank  Discount.  A  certain  per  cent  deducted  from  the 
amount  of  future  due  paper  by  a  bank,  for  carrying  the  paper 
to  maturity.  In  the  sets  of  the  American  Bookkeeping  Series,  the 
bank  discount  is  computed  on  the  amount  at  the  given  rate,  for 
the  exact  days  from  date  of  discount  to  maturity,  and  each  day 
computed  as  1/360  of  a  year. 

Bankruptcy.    Prin.  681. 

Barrels,     (brl.) 

Barter.  To  traffic  or  trade  one  commodity  for  another  with- 
out using  money.  This  is  a  crude  method  of  exchange  which  is 
now  seldom  practiced  by  civilized  people. 

Betterment.  (1)  An  addition  to  property  already  owned. 
Betterments  increase  the  value  of  an  investment,  and  are  not  mere 
replacements  of  anything  already  installed.  (2)  Improvements 
for  the  personal  or  social  welfare  of  employees,  as  recreation  or 
lecture  rooms,  baths,  etc. 

Bill  Book.     (B.  B.) 

Bill  of  Exchange.    A  foreign  draft.       Prin.  68  E. 

Bill  of  Goods  or  Services.  An  itemized  statement  of  gonls 
sold  or  services  rendered,  showing  the  amount  payable  for  same. 

Bill  of  Lading.  (B.  L.)  An  itemized  acknowledgment,  by  a 
transportation  company,  showing  list  of  goods  to  be  transported. 
with  shipping  directions,  transportation  charges,  and  other  agree- 
ments as  to  shipment  and  delivery. 

Bill  of  Sale.  A  document  formally  transferring  ownership 
in  personal  property  from  one  person  to  another. 

Hills  Payable.  '  (B.  Pay.)     Prin.  32-32  B;  Form  13  H. 

Bills  Receivable.  (B.  Rec.)  Prin.  25F-25H;  Form 
11  C,  12  D. 

Bills  Receivable  Discounted.     (B.  Rec.  Dis.)     Prin.  35  B. 

Board  of  Trade.  An  organization  of  business  men  for  the 
:id\;inermont  of  commerce. 

Bona  Fide.     In  good  faith;  without  deceit  or  fraud. 

Bond.  A  document  or  agn-i-nn-nl  under  seal.  The  ordinary 
(  ..iMiM-n-i.-il  l.ond-  ;ire  issued  by  tin*  (Jovernment.  tin-  St.-ile.  :i 
pvivaite  rorporation  or  an  individual.  All  promise  Hi.-  p:i\nieni 
of  money,  together  with  interest  payim -nt s  on  Qiftsame,  A  .<>U]H.H 
bond  \i:i<  intercut  coupons  attached  wlm-h  MIT  <-ut  «»1Y  :nul  col- 
they  niMtnre.  Priii.  2">  .T. 

Kond.d  Goods.  M<MTli:imli<e  stored  in  :i  Ix.nded  warehouse, 
or  in  bonded  cars,  the  ..\\ner  luivinir  -hen  bond-  sc.-urin-  ihe 
pimiient  of  import  duties  or  of  Internal  revenues,  up  m  their  re 
mov.-il  or  their  .-niivnl  at  some  inland  city  of  entry.  ;md  hefore  a 
specified  time. 


INDEX-COMMENTARY  1 7.: 

Bonus.  A  gift  or  extra  allowance  for  a  business  favor  or 
service,  as  the  placing  of  a  loan,  the  making  of  an  investment. 
Cities  and  Chambers  of  Commerce  often  grant  bonuses  to  those 
who  establish  new  industries  in  a  city. 

Bookkeeping.    Prin.  2. 

Book  Account.  The  account  kept  in  the  ledger  with  a  person 
to  whom  credit  sales,  or  from  whom  credit  purchases,  are  made. 

Books  of  Original  Entry.  Such  books  as  contain  the  first 
entries  of  transactions,  as  opposed  to  ledgers,  which  contain  the 
posted  entries. 

Bought.     (Bot) 

Bought  Book.    Prin.  76. 

Bound  Ledger.    Prin.  72  F. 

Boxes.     (Bx.) 

Broker.  One  whose  business  is  to  act  as  agent  in  buying  and 
selling  financial  paper,  stocks  or  other  property  for  others.  His 
cli.-iru'e  for  the  service  is  called  brokerage. 

Bundles,     (bdl.) 

Bushels,     (bu.) 

Business.     Prin.  4. 

Business  Forms.  Prin.  80 ;  For  depositor,  Prin.  80  B  ;  Miscel- 
laneous, Prin.  80  C. 

Business  Ledger.  The  part  of  a  complete  ledger  containing 
the  nominal,  or  profit  and  loss,  accounts.  Prin.  51-60. 

Business  Organization/  A  business  organization  is  a  com- 
bination of  directing  intelligence,  labor,  capital  and  equipment, 
working  together  to  produce  some  utility,  and  to  sell  it. 

Business  Statement.  A  list  of  the  profits  and  losses  covering 
a  fiscal  period,  entered  with  more  or  less  detail,  as  the  case  de- 
mands. Also  called  a  profit  and  loss  statement. 

Buyer.  (1)  The  one  who  makes  the  purchases  for  a  concern. 
(2)  The  manager  of  a  department  in  a  department  store,  who  is 
responsible  for  the  purchases  and  sales  in  his  department. 

Capital.  ( Cap. )  The  amount  of  money  or  property  set  aside 
for  the  use  of  the  business.  Where  no  definite  amount  is  for- 
mally set  aside  for  this  purpose,  the  net  worth  is  the  capital. 

Capital  Account.     Prin.  37  to  39  H ;  Form  10  E-F,  10  L,  12  P. 

Capital  Expense  and  Income.    Prin.  48 ;  Account  of,  Prin.  58. 

Card  Ledger.    Prin.  72  H. 

Care  of.     (c/o) 

Cartage,     (ctg.) 

Cases,     (cs.) 

Cash  Account.  Prin.  24,  24  B,  24  C,  24  D ;  Forms  of,  Prin. 
24  B-24  F. 

Cash  Book.  (C,  B.)  Prin.  74  to  74  H;  Forms  10  A,  10  B, 
11  A,  13  B,  161. 

Cashier's  Account.     (C.  A.) 

Cashier.  (1)  One  who  has  charge  of  money;  (2)  the  exec- 
utive officer  of  a  bank. 

Cash  Journal.    Prin.  73  G. 

Cents,     (ct.  or  <£.) 

Certificate.  A  written  voucher  attesting  to  some  fact:  as  a 
certificate  of  deposit,  (which  is  a  voucher  that  money  has  been 


174  INDEX-COMMENTARY 

deposited  in  a  bank)  ;  a  certificate  of  stock,  vouching  the  owner- 
ship of  stock  in  a  company. 

Certified  Check.  A  check  that  has  been  certified,  or  accepted, 
by  the  bank  on  which  it  is  drawn,  making  the  bank  responsible 
for  its  payment 

Changing  Single  to  Double  Entry.    Prin.  69  F. 

Charge.  To  charge  an  account  means  to  make  an  entry  to 
be  posted  as  a  debit. 

Charge  and  Credit,  Theory  of.    Prin.  71 1  to  71 R. 

Charter.  (1)  A  document  issued  by  authority  of  the  nation 
or  a  state  defining  the  rights  and  privileges  of  corporations.  (2) 
To  hire  or  let  a  conveyance  of  transportation ;  as  a  ship,  a  rail- 
way car. 

Chattel.  Any  kind  of  property  except  real  estate.  Ex- 
amples: merchandise,  notes  and  accounts,  animals,  leases  of  real 
estate,  etc. 

Checking-Account.  The  account  of  money  deposited  in  a 
bank  subject  to  check. 

Check  Book.    Prin.  74  D. 

Check  Mark.  (V)  A  mark  placed  opposite  amounts  to  show 
that  they  have  been  verified  or  posted.  Frequently  the  same 
amounts  are  checked  over  more  than  once.  Different  colored  inks 
should  be  used  in  subsequent  checkings. 

Check  Stub.     Prin.  74  D. 

Chose  (pronounced  shos).  A  thing  recoverable  by  an  action 
at  law.  A  "chose-in-action,"  is  something  to  which  one  has  th" 
right  but  not  the  possession.  Examples:  A  right  to  damages  for 
breach  of  contract  or  for  injury.  Notes,  bonds  and  other  prom  is  >s 
not  negotiable,  are  commonly  called  choses  in  action,  as  they  evi- 
dence the  right  to  collect 

Claims  Against  Others.    Prin.  25-25  K. 

Clearing  House.  An  association  of  banks  in  a  city  for  the 
purpose  of  daily  adjustment  of  their  claims  against  one  another 
to  be  effected  at  one  time  and  place. 

Closing  an  Account.  An  account  is  closed,  by  ruling  closing 
lines,  when  it  ceases  to  represent  an  element  in  the  busin  «& 
This  may  be  when  both  debit  and  credit  totals  are  equal,  or  when 
the  difference  between  debit  and  credit  sides  are  carrid  to  some 
other  account,  as  when  an  account  is  closed  into  Profit  and  Loss. 

Closing  the  Ledger.  Prin.  72  O;  closing  financial  ledger,  Prin. 
72  R ;  closing  business  ledger,  Prin.  72  S. 

Closing  Entries  in  Journal.    Form  14D-14F. 

C.  0.  D.  Account.     Prin.  25  C ;  Form  14  M. 

Coin.  Metal  impressed  with  the  government  stamp,  and  used 
as  money. 

Collateral  Security.  Papers  owned  by  a  debtor  and  passed 
to  a  creditor  as  security  for  an  obligation. 

Collection  of  Accounts  and  Notes.    Prin.  68  C. 

Collection  Charges.  The  charges  made  by  a  bank  or  col- 
lector for  collecting  claims.  In  the  sets  accompanying  this  text, 
bank  collection  charges  are  computed  at  15^  per  $100,  or  part 
thereof. 

Columnar  Cash  Book.    Prin.  74  H. 


INDEX-COMMENTARY  175 

Columnar  Journal.    Prin.  73  F. 

Commercial  Paper.  Bills  of  exchange,  drafts  and  notes  given 
in  the  course  of  trade.  Prin.  68  E. 

Commission.  (Com.)  A  percentage  given  for  the  sale  or 
purchase  of  goods,  or  the  transaction  of  other  business. 

Commodity.  A  term  relating  to  everything  movable  that  is 
bought  and  sold.  Examples :  goods,  wares,  merchandise,  the  prod- 
ucts of  lands  and  manufactures. 

Common  Carrier.  One  who,  for  pay,  engages  to  transport 
goods  or  persons  for  anyone  who  chooses  to  employ  him. 

Common  Law.  Law  based  upon  the  precedent  of  usage, 
rather  than  that  contained  in  the  statutes  enacted  by  legislative 
bodies. 

Compact.    An  agreement  or  contract  between  parties. 

Company.  (1)  A  corporation  or  an  association.  (2)  A  term 
used  in  a  firm  name  to  designate  other  partners  whose  names  are 
not  given. 

Compound  Entry.  An  entry  consisting  of  more  than  one  debit 
or  credit. 

Complete  Expense  Account.    Prin.  55. 

Complete  Expense  Book.    Prin.  74  F. 

Complete  Journal.    Prin.  73  C. 

Complete  Ledger.    Prin.  72  B. 

Compromise.  An  agreement  to  settle  a  claim  by  paying  or 
receiving  only  a  part  of  the  amount.  To  adjust  any  kind  of  busi- 
ness differences  by  an  agreement  based  upon  mutual  concessions. 

Concern.  A  general  term  referring  to  a  business  and  its  own- 
ers, in  the  sense  of  an  organization  to  accomplish  some  under- 
taking. 

Condition  of  Business.  The  result  shown  by  a  financial  state- 
ment. The  condition  depends  on  the  amounts  and  kinds  of  as- 
sets and  liabilities. 

Consideration.  The  material  cause  of  a  contract.  The  thing 
promised,  or  the  reason  for  the  promise. 

Consignee.    One  to  whom  goods  are  sent. 

Consignment.  (Const.)  Merchandise  consigned  to  an  agent 
to  be  sold. 

Consignor.    One  who  sends  or  consigns  the  merchandise. 

Consumer.  The  person  that  uses  up,  appropriates  to  himself, 
or  changes  the  character  of  a  utility  received. 

Contingent.  Not  certain.  Contingent  liability,  Prin.  35 ;  Con- 
tingent fund,  Prin.  25. 

Contract.  An  agreement  between  parties  specifying  what 
each,  with  the  consent  of  the  others,  promises  to  do. 

Controlling  Account.    Prin.  25  E  ;  also  72  C,  72  D. 

Convertible.  Capable  of  being  turned  into  money,  or  other 
equivalent,  as  a  convertible  bond  or  other  security. 

Co-Partnership.  The  condition  effected  through  the  joining 
of  two  or  more  persons  into  one  firm  for  the  purpose  of  carrying 
on  any  enterprise,  a  partnership. 

Copyright  Account.    Prin.  29  F. 

Corporation.  A  number  of  persons  associated  together  in 
conformity  with  laws  which  give  them  certain  powers  to  act  as 


176  INDEX-COMMENTARY 

an  artificial  person  for  conducting  any  enterprise  specified  in 
their  charter.  Prin.  68  H. 

Correspondence.     An  interchange  of  letters. 

Correspondents.  (1)  Banking  firms  and  collection  agencies 
with  whom  a  bank  has  accounts  are  called  its  correspondents.  (2) 
Any  one  with  whom  business  is  carried  on  by  means  of  letters. 

Coupon.  An  interest  note,  or  certificate,  attached  to  a  bond, 
which  is  cut  off  from  the  bond  and  collected  when  due. 

Coupon  Bonds.     Bonds  with  interest  coupons  attached. 

Covenant.    A  mutual  agreement  under  seal. 

Credentials.    Testimonials  giving  authority. 

Credit.  (1)  Trust  given  to  a  debtor.  (2)  ^Mercantile  reputa- 
tion entitling  one  to  be  trusted.  (3)  (Cr.)  The  side  of  an  account 
on  which  we  enter  all  values  yielded  from  the  source  represented 
by  the  title.  (4)  Business  credit,  Prin.  15. 

Creditor.     (Cr.)     One  giving  credit;  one  whom  we  owe. 

Currency.  Paper  money  as  distinguished  from  coin.  In  a 
broader  sense  .the  entire  circulating  medium  of  exchange. 

Custom  House.  The  place  where  government  duties  are 
collected. 

Customers.  The  persons  to  whom  the  business  regularly  sells 
its  goods  or  services. 

Day  Book.     (D.  B.) 

Days,     (ds.) 

Debenture.  A  document  under  seal,  acknowledging  indebt- 
edness; commonly  seen  in  the  form  of  debenture  bonds  or  cer- 
tificates issued  by  corporations,  for  loans  drawing  interest,  and 
easily  transferable  from  one  investor  to  another. 

Debit.  An  entry  to  indicate  the  receipt  of  cash,  or  the  cost 
to  the  business  of  some  business  utility  other  than  cash.  Debits 
are  entered  in  the  left  of  the  two  money  columns  of  account 

Debit  and  Credit,  Theory  of.    Prin.  71 1  to  71  R. 

Debt.    The  amount  owed  by  one  to  another. 

Debtor.     (Dr.)     The  one  who  owes  an  amount. 

Deed.  A  written  contract  under  seal,  transferring  title  to 
real  property. 

Defalcation.  (1)  An  abatement  or  discount;  (2)  nlso.  MM 
embezzlement. 

Defaulter.  A  person  who  fails  to  account  for  money  or  prop 
erty  intrusted  to  him,  usually  applied  to  custodians  of  public 
funds. 

Deferred  Charges.  Expenses  paid  during  <>n,>  lisc.-il  period  t'»r 
tin-  benefit  of  a  following  fiscal  period,  or  a  following  long  period 
of  thin1.  Tims,  a  hirgr  p;iyment  for  advertising  mnd<>  just  l>efore 

closing  tin-  I k*  would  be  a  deferred  charge.  Expenses  of  or- 

iranizing  ;i  rom-ern  are  often  deferred  charge. 

Delivery.    Tin-  tnmstVr  of  money  or  property  to  another. 

Demand.      A   f«»nn:il   pn-^Mit:ili«tii  of  :i   rlnim. 

Department.     (Dept)     Dept.  Expense,  Prin.  55  B. 

Deposit.  (Dep.)  The  funds  left  in  a  bank  for  safe  keeping, 
or  on  checking  account. 

Deputy.  A  person  appointed  to  act  in  the  place  of  a  public 
official. 


I NDEX-COMMENTARY  177 

Department  Expense.    Prin.  55  B. 

Departmentized.  Divided  into  several  departments,  each  de- 
partment being  considered  a  unit  of  the  entire  organization. 

Depreciation.  (Dep.)  Prin.  27  C;  account  of,  Prin.  58 B; 
when  determined,  Prin.  58  B. 

Dishonor.  Refusal  to  accept  or  to  pay  commercial  paper 
when  it  is  presented  to  the  debtor. 

Discount.  (Dis.)  An  allowance  or  deduction  from  the 
amount  of  a  debt. 

Discounting.  Transferring  to  a  bank  or  broker  notes  receiv- 
able or  other  time  paper,  for  an  amount  in  cash  less  than  the 
amount  collectible  at  maturity..  The  one  disposing  of  the  notes  is 
usually  liable  for  their  payment  on  failure  of  the  maker  to  pay. 

Discount  on  Bonds  Account.  The  account  chargeable  for  the 
difference  between  face  and  amount  realized  from  issue  of  bonds, 
made  by  a  company,  and  sold  below  par. 

Distribution  of  Net  Profit  or  Loss.  Sole  proprietorship,  Prin. 
60  A;  Partnership,  Prin.  GOB;  Corporation,  60  C. 

Dividend.  (Div.)  The  share  in  profits  passed  to  a  stock- 
holder. 

Dollars.     ($) 

Double  Entry.  (D.  E.)  A  method  of  bookkeeping  in  which 
the  required  debits  and  credits  for  all  transactions  are  equal. 

Dozen,     (doz.) 

Draft,  (dft.)  An  order  drawn  by  one  party  (the  drawer), 
directing  a  second  party  (the  drawee),  to  pay  a  sum  of  money  to 
the  order  of  a  third  party  (the  payee). 

Drawee.     The  person  on  whom  checks  or  drafts  are  drawn. 

Drawer.    The  person  issuing  a  check  or  draft. 

Drawing  Account.  An  account  of  funds  to  the  credit  of  a 
person  and  subject  to  his  withdrawal  at  will. 

Drayage.     Charges  made  for  transfer  of  goods  by  dray. 

Due-Bill.     A  written  acknowledgment  of  a  sum  owed. 

Duplicate.  A  copy.  Duplicate  bills  consist  of  one  original 
and  one  copy. 

Duplicate  Billing  Systems.    Prin.  75  C  and  75  D. 

Each,     (ea.) 

Earned  Shop  Cost.  An  added  value  placed  on  material  in 
process  of  manufacture,  when  taking  inventory. 

Earnest.  An  initial  part  payment  or  delivery  to  secure  a 
verbal  contract  of  sale. 

Eleemosynary  Institution.  One  supported  by  charity,  or  pub- 
lic funds,  as  a  free  hospital,  or  asylum. 

Embezzlement.  The  act  of  a  trustee  or  other  agent,  of  un- 
lawfully converting  to  his  own  use  money  or  property  in  his  pos- 
session, which  belongs  to  another. 

Encumbrance.  A  claim  or  lien  against  property  which  dimin- 
ishes its  asset  value. 

Endorsement.  Any  subsequent  writing  on  the  back  or  face 
of  commercial  paper,  which  affects  the  terms  or  conditions  of 
payment 

Entry.  The  record  of  a  transaction  together  with  the  ac- 
count analysis.  Prin.  6. 


178  INDEX-COMMENTARY 

Equipment  Account.     Prin.  27  B;  Form  10  D. 

Equity.  (1)  The  legal  principles  of  right  or  justice  which 
may  be  invoked  in  a  court  of  law  to  correct  miscarriage  of  the 
common  or  statute  law  ill  particular  cases.  (2)  An  equitable 
claim,  or  interest,  as  an  owner's  interest  in  mortgaged  property, 
beyond  the  amount  covered  by  the  mortgage. 

Errors  Excepted.     (E.  E.) 

Exchange.  (Exch.)  (1)  The  process  of  transmitting  money 
by  drafts;  (2)  the  premium  on  drafts.  In  the  American  Book- 
keeping Series,  exchange  on  bank  drafts  is  computed  at  10  cts.  for 
every  hundred  dollars  and  additional  amount  of  $50.  On  a  single 
amount  of  less  than  $50,  5  cts.  bank  exchange  is  allowed  when 
purchasing  a  draft;  when  the  draft  is  for  hundreds,  no  exchange 
is  charged  on  an  additional  amount  less  than  $50. 

Ex-Dividend.  A  term  used  to  describe  stock  sold  after  the 
transfer  books  are  closed.  The  seller  of  the  stock  receives  the 
dividend,  the  buyer  receives  the  stock  without  the  dividend. 

Execution.  (1)  The  written  authority  given  by  a  court  to  an 
officer  directing  him  to  enforce  a  judgment.  (2)  The  act  of  sign- 
ing and  sealing  a  legal  instrument. 

Executor.  One  appointed  by  will  to  settle  an  estate.  Prin. 
68  J. 

Expense.     (Exp.)     Prin.  410. 

Expense  Accounts.  Prin.  55  to  55  B ;  Form  10  J-K  and  10  N, 
12  J ;  Selling  Expense,  56 ;  Office  Expense,  57 ;  Capital  Expense,  58. 

Expense  Book.    Prin.  74  F. 

Extension.  The  results  computed  from  a  certain  column  or 
columns  of  figures,  and  carried  to  another  column. 

Face.  The  principal  sum  of  money  written  in  a  note,  draft, 
check  or  other  commercial  paper,  as  contrasted  with  the 
"amount,"  which  is  the  principal  sum  and  interest  added. 

Factor.    An  agent  or  commission  dealer. 

Filing.    Prin.  81. 

Financial  Business.  The  business  of  loaning  money,  renting 
property  or  otherwise  letting  the  use  or  benefit  of  capital  for  the 
purpose  of  realizing  income,  as  banking,  insurance,  renting,  etc. 

Financial  Ledger.  The  part  of  a  complete  ledger  containing 
the  real,  or  asset  and  liability,  accounts.  Prin.  21. 

Financial  Management.    Prin.  21  B. 

l-'i i i;in rial  Profits.    Prin.  45. 

Financial  Statement.  Prin.  11,  20A-20E.  Recapitulation, 
Prin.  11  to  20.  Forms  1,  2,  3,  4,  10  A,  12  M. 

Finances.  Funds  or  money.  Financial  operations  are  those 
involving  the  receipt  and  payment  of  cash. 

Firkin,     (fir.) 

Firm.  A  business  organization  owned  by  more  than  one 
tor. 

Fiscal  Period.  The  time  for  a  final  summing  up  of  the  profits 
HIM!  losses  of  the  business  operations,  ordinarily  one  year.  Prin. 
711. 

Fixed  Property.  The  property  owned  by  a  business  which  is 
kept  on  account  of  ite  usefulness,  and  thus  occupies  a  fixed  place 
In  the  organization.  Buildings  occupied,  equipment,  and  good  will 


INDEX-COMMENTARY  179 

are  typical  kinds  of  fixed  property.  An  itemized  list  of  all  fixed 
property  should  appear  in  the  ledger  accounts. 

Fixtures.  The  attachments  to  real  property  in  the  nature  of 
furnishings,  as  shelves,  counters,  gas  and  electric  apparatus,  etc. 

Flat.  A  term  referring  to  a  price  of  commercial  paper  that 
does  not  take  into  account  accrued  dividends  or  interest,  some- 
times called  a  "lump  price." 

Floating  Debt.  Miscellaneous  obligations  for  the  payment  of 
which  no  special  provision  or  fund  has  been  made.  The  floating 
debts  are  to  be  paid  out  of  the  current  revenue  or  income. 

Floating  Property.  The  commodities  or  material  owned  by 
the  business  for  consumption,  manufacture  or  sale.  The  items 
making  up  such  property,  since  they  are  constantly  undergoing 
change,  are  not  itemized  in  ledger  accounts,  but  are  ascertained 
from  time  to  time,  by  inventory. 

Fluctuation.  The  rise  and  fall  in  values  incident  to  the  con- 
ditions of  commerce.  Fluctuation  downward  is  sometimes  con- 
fused with  depreciation,  which  is  a  very  different  matter. 

Folio,     (fol.) 

Foot  or  Feet,     (ft.) 

Footing.    The  sum  of  a  column  of  figures. 

Foreclosure.  The  act  of  taking  legal  possession  of  property 
under  the  terms  of  a  mortgage. 

Forgery.  Any  unauthorized  alteration  of  a  commercial  paper 
or  document  which  affects  its  value  or  the  interests  of  those  who 
hold  it 

Forward.     (Fwd.) 

Fractions  of  a  Cent.  In  the  sets  of  the  American  Bookkeep- 
ing Series,  when  a  final  result  of  computations  on  bills,  notes,  etc., 
involves  a  fraction  of  a  cent,  one-half  or  greater  than  one-half, 
the  fraction  is  counted  as  an  additional  cent.  When  discount  in- 
volves a  similar  fraction,  it  is  counted  an  additional  cent  of  dis- 
count. Fractions  less  than  one-half  cent  are  disregarded  in  ex- 
tended amounts  and  final  results. 

Franchise.  A  valuable  privilege  granted  by  municipal  au- 
thority to  a  person,  firm  or  company,  to  be  used  in  carrying  on  a 
business.  The  right  of  street  car,  telephone,  light,  and  other  pub- 
lic service  corporation  to  use  the  streets  for  tracks,  poles,  wires, 
etc.,  is  secured  •  by  franchise  granted  by  municipal  or  state 
authority. 

Franchise  Account.    Prin.  29  C;  How  written  off,  Prin.  580. 

Free  on  Board,  (f.  o.  b.)  Merchandise  sold  "f.  o.  b."  is  de- 
livered to  the  transportation  company  at  the  point  named  in  the 
terms  of  sale,  without  expense  to  the  buyer. 

Freight,  (frt.)  (1)  The  compensation  to  railroads  or  other 
carriers  for  transportation  of  goods.  (2)  The  goods  transported 
are  termed  freight. 

Freight  on  Merchandise  Bought.     Prin.  53  D ;  Form  14 1. 

Freight  on  Merchandise  Sold.    Prin.  53  E. 

Funds.  (1)  Money  or  capital  set  aside  for  a  special  purpose. 
(2)  The  term  "funds"  often  means  ready  money.  Prin.  24  E. 

Furniture  and  Fixtures  Account.    Prin.  27  D. 

Furniture.    The  movable  general  equipment  of  a  building  for 


180  INDEX-COMMENTARY 

the  use  of  the  persons  occupying,  e.  g.,  chairs,  desks,  carpets,  filing 
cabinets,  etc. 

Gallons,     (gal.) 

General  Accounts.  The  accounts  kept  in  the  general  ledger 
together  with  the  cash  account. 

General  Cash  Book.    Prin.  74  F. 

General  Expense.    Account  of,  Prin.  57. 

General  Journal.    Prin.  73  D. 

General  Ledger.    Prin.  72  C. 

Goods.    Merchandise  or  commodities. 

Good  Will  Account.     Prin.  29  B ;  How  written  off.  Prin.  58  C. 

Gross,  (gr.)  The  entire  amount  or  bulk  before  deductions 
are  made.  Gross  earnings  are  earnings  before  expenses  are  taken 
out.  Gross  weight  is  weight  before  the  weight  of  case  or  con- 
tainer is  deducted. 

Gross  Trading  Profit.    Prin.  42. 

Guaranty,  (guar.)  (1)  A  surety  for  the  performance  of  a 
contract  in  case  of  failure  by  the  contracting  party.  (2)  A  se- 
curity against  loss. 

Half,     (hf.) 

Handkerchief.     ( hdkf . ) 

Hogshead,     (hhd.) 

Honor.  To  accept  or  to  pay  a  written  obligation  according  to 
its  terms. 

Hundred.     (C.) 

Hundred  Weight.     (Cwt.) 

Hypothecate.  To  subject  securities  to  legal  liability  for  the 
payment  of  a  debt  without  delivery  or  transfer  of  title.  See 
Collateral. 

Imprest  Fund.    Prin.  24  E. 

Income.     Prin.  41  B  and  42.    Accounts  of,  Prin.  54. 

Income  Tax.    Prin.  68  K. 

Income  and  Expense  Accounts.  Prin.  49,  54  and  59;  Form 
11  E. 

Indenture.    A  mutual  agreement  in  writing. 

Index.     Prin.  72  E ;  Form  12  B. 

Indorsement.     See  Endorsement. 

Insolvency.  Inability  to  meet  indebtedness.  A  business  Is  in- 
solvent when  its  liabilities  exceed  its  assets. 

Instant,     (inst.)     In  the  current  or  present  month. 

Insurance  Account.     Prin.  29  D. 

Insurance  Policy.  (Ins.  p.»l.)  The  certificate  given  by  the 
insurance  company  to  the  assured,  obligating  the  company  to  re- 
imburse cither  wholly  or  in  part  for  any  losses nsioned  by 

fire.  water,  storm,  etc.,  as  specified  in  the  policy. 

Installment.  One  of  the  parts  of  a  debt  payable  at  iutervnK 
The  iiist.MllTnent  system  of  selling  property  useful  to  families,  such 
Bl  IMM.UV.  furniture,  homes,  etc.,  whereby  payment  is  made  weekly 
or  monthly,  is  common. 

Intangible  Asset  Accounts.    Prin.  29. 

Interest.  (Int.)  A  percentage  allowance  for  the  use  of 
money  or  its  equivalent  for  a  given  time,  usually  one  year. 

In   the  American   F.Mokkeei.ii^g  Series,  interest  computation-. 


INDEX-COMMENTARY  181 

bank  discount,  are  made  by  the  ordinary  interest  method; 
that  is,  the  time  is  computed  in  months  (1/12  of  year)  and  days 
(1/30  of  month),  found  by  subtracting  the  earlier*  from  the  later 
date,  unless  otherwise  specified  in  the  transactions. 

Interest  Account.     Prin.  59  B  ;  Form  14  K. 

Intestate.    Having  died  without  leaving  a  will. 

Inventory.  (Invt.)  An  itemized  schedule  showing  the  values 
<»f  property  or  claims  owned,  or  liabilities  owed  on  a  certain  date. 
Floating  property  comprises  the  principal  values  found  in  the 
regular  inventory  taken  at  the  close  of  a  fiscal  period.  Form  4  H. 

Inventory  Account.  Prin.  60 ;  of  property,  Prin.  26,  26  B ;  of 
claims  receivable,  Prin.  26  C ;  of  claims  payable,  Prin.  34.  Closing 
and  opening,  Prin.  72  P ;  Form  13  G. 

Inventory  Book.     Prin.  77  to  77  D  ;  Form  4  H  and  14  N. 

Investment.  (1)  The  appropriation  of  money  or  capital  for 
carrying  on  business,  with  a  view  to  profit  and  with  a  risk  of 
loss.  (2)  The  purchase  of  securities  with  a  view  to  profit  from 
their  income. 

Invoice.  (Inv.)  An  itemized  statement  of  goods  sold  show- 
ing prices,  terms  and  amounts.  The  invoice  is  delivered  to  the 
buyer  by  the  seller. 

Invoice  Book.     (I.  B.)     See  Prin.  76 B. 

Jobber.  A  merchant  who  buys  goods  from  importers  and 
manufacturers,  and  sells  in  quantity  to  wholesale  and  retail 
merchants. 

Joint  Stock  Company.  A  partnership  with  the  capital  divided 
into  shares  held  by  the  partners.  The  powers  and  privileges  of  a 
joint  stock  company  are  defined  by  laws  differing  in  detail  in 
various  states. 

Journal.  (J.)  Prin.  7;  journal  in  detail,  Prin.  73  to  73  G; 
Form  12  A. 

Journalizing.  A  systematic  classification  of  the  debits  and 
credits  of  business  transactions.  Readjustment  entries,  Form 
14  D ;  entries  to  close  nominal  accounts,  Form  14  E ;  entries  to 
close  P.  &  L.  acct,  Form  14  F ;  compound  opening  entry  ing,  Form 
13  A  :  practical  journalizing,  Prin.  71  R. 

Journalizing  Orally.    Prin.  71  R. 

Journalizing  Rules.    Prin.  71 1  to  71  R. 

Judgment.  The  decision  of  a  court  supporting  a  claim  against 
a  debtor. 

Judgment  Note.  A  promissory  note  containing  a  special 
agreement  giving  the  payee  power  of  attorney  to  confess  judgment 
in  behalf  of  the  maker.  This  dispenses  with  necessity  of  suit  for 
collection,  and  permits  prompt  attachment  of  property  to  satisfy 
the  note  in  case  of  its  dishonor. 

Junior.     (Jr.) 

Landlord.  The  owner  of  real  estate  which  is  leased  to 
tenants. 

Land  Buying.     Prin.  68  D. 

Lease.  A  contract,  in  writing,  granting  the  occupancy  of 
property  for  a  given  period  at  a  stated  compensation. 

Ledger.  (L.)  Prin.  8;  ledger  in  detail.  Prin.  72  to  72  S ; 
financial  ledger,  Prin.  21-40 ;  business  ledger,  Prin.  51-60. 


182  INDEX-COMMENTARY 

Legal  Aspects  of  Auditing.    Prin.  68-68  K. 

Legal  Tender  Money.  Any  money  which,  by  law,  a  debtor 
may  require  his  creditor  to  receive  in  payment  unless  there  is  a 
contrary  stipulation  in  the  contract  or  obligation  itself. 

The  following  classes  of  United  States  money  are  a  legal  ten- 
der to  the  extent  specified : 

Gold  coins  for  all  debts  public  and  private  to  any  amount. 

Standard  silver  dollars,  for  all  debts  public  and  private  unless 
otherwise  stipulated  in  the  contract. 

Subsidiary  silver  coins  (coins  less  than  one  dollar),  for  all 
dues  public  or  private  in  sums  not  exceeding  ten  dollars. 

Minor  coins  (copper,  bronze,  or  nickel),  for  any  amount  not 
exceeding  twenty-five  cents  in  one  payment 

United  States  notes  or  "greenbacks,"  for  all  debts  public  and 
private,  except  duties  on  imports  (payable  to  the  government) 
and  interest  on  the  public  debt  (payable  by  the  government). 

Treasury  notes  of  1862  and  of  1890  are  also  legal  tender  to 
the  same  extent  as  greenbacks,  and  those  of  1890  are  receivable 
for  customs  #nd  other  public  dues. 

Letter  Book.     (L.  B.) 

Letter  of  Credit.  A  letter  issued  to  travelers  by  a  bank,  ad- 
dressed to  banks  in  foreign  cities,  directing  payment  of  funds  to 
the  holder. 

Liabilities.    Prin.  14;  consist  of,  Prin.  17. 

Liability  Inventory  Account.    Prin.  34;  Priu.  77  C. 

Lien.  A  preferred  right  in  property  allowed  by  law  and 
which  right  arises  from  some  service  in  connection  with  the 
property.  A  mechanic's  lien  is  the  right  of  a  mechanic  in  the 
building  he  has  helped  construct,  but  has  not  been  paid  for. 

Limited.  A  term  appearing  in  the  firm  title  indicating  that 
the  liability  of  stockholders  is,  by  agreement,  limited  to  a  certain 
amount,  usually  the  amount  of  their  investment. 

Liquidation.  The  act  of  determining  the  persons  and  amounts 
owed,  and  of  applying  assets  to  settlement. 

List.    Prin.  18;  inventory  lists,  Prin.  19. 

Locating  Errors.    Prin.  63  C,  63  D. 

l.oos.-l.raf  Ledger.    Prin.  72 G. 

Losses.    Prin.  41  C. 

Maker  of  a  Note.    The  one  who  signs  it 

Manager.     (Mgr.) 

Manufacturing  Account.  (Mfg.  a/c).  The  account  which 
shows  the  cost  of  manufacturing  the  product 

Manufacturing  Business.  The  business  of  changin.u'  raw  ma- 
terial into  imMvhamliso.  or  commodities  for  sale. 

Manufacturing  Profit.    Prin.  43. 

Msit  urity.     ( 1 )  The  date  on  which  a  debt  is  legally  collectible. 

Memorandum.     (Man.) 

Mercantile  Ajjmcy.  An  organisation  to  gather  financial  in- 
formation about  business  houses  or  individuals,  and  sell  reports 
of  inf.. i -ii IM tion  thus  gathered  to  interested  persons,  as  a  basis  for 

Merchandise.  (Mdse.)  Goods  or  commodities  in  salable 
condition. 


INDEX-COMMENTARY  183 

Merchandise  Bought  Account.    Prin.  530. 

Merchandise  Bought  Book.    Prin.  76  B. 

Merchandise  Sold  Account.    Prin.  53  B. 

Merchandise  Sold  Book.    Prin.  75. 

Merchandise  Manufactured  Account.    Prin.  53  G. 

Money.  Money  consists  of  -(1)  pieces  of  gold,  silver,  copper, 
etc.,  coined  and  issued  by  governmental  authority;  (2)  paper,  so 
issued,  which  may  be  legal  tender  instead  of  coin;  (3)  other 
paper,  lawfully  employed  in  payment  of  business  obligations. 

Mortgage.  (Mtg.)  A  document  of  conditional  transfer  of  the 
title  to  real  or  personal  property,  as  security  for  the  payment  of 
a  debt.  The  debtor  is  called  the  mortgagor;  the  creditor,  the 
mortgagee. 

Mortgage  Loan  Account.    Prin.  25  I,  33. 

Negotiable  Paper.  A  check,  note,  draft,  or  other  paper  trans- 
ferable from  one  holder  to  another  who  may  enforce  payment 
without  reference  to  equities  existing  between  the  first  parties. 

Net.    Not  subject  to  further  deduction,  as  net  price,  net  profit. 

Net  Invoice.  The  sum  of  the  invoice  after  discounts  are  de- 
ducted. In  the  American  Bookkeeping  Series,  one-half  or  major 
fraction  of  a  cent  belonging  to  a  discount  is  considered  an  addi- 
tional cent  discount. 

Net  Profit  for  Distribution.    Prin.  50. 

Net  Trading  Profit.    Prin.  46  C. 

Net  Worth.  The  excess  of  assets  over  liabilities  of  a  given 
business  or  person.  Prin.  67  B. 

Nominal  Accounts.  Accounts  that  explain  the  sources  of 
profits  and  losses.  Prin.  51-60. 

Nominal  Assets.  Assets  carried  on  the  books  at  the  last  re- 
corded value  but  which,  in  the  meantime,  may  have  increased  or 
diminished,  as  the  goods  or  property  listed  in  an  inventory. 

Normal  Tax.     Prin.  68  K. 

Notary  Public.  (N.  P.)  A  state  ofllcer,  generally  appointed 
by  the  governor  for  a  term  of  years,  principally  to  take  acknowl- 
edgment of  instruments,  to  make  demand  for  payment  of  com- 
mercial paper,  and  to  protest  for  non-payment,  and  to  administer 
oaths.  See  Acknowledgment. 

Note  Book.     (N.  B.) 

Notes  Receivable  Account.    Prin.  25-25  H. 

Notes  Payable.    Prin.  32,  32  B. 

Number.     (No.),  also  (#),  when  placed  before  the  figures. 

Office  Expense.    Prin.  47 ;  account  of,  Prin.  57. 

Operations.    Prin.  4. 

Open  Account.  (1)  The  ledger  account  with  a  creditor  or 
debtor  in  which  the  current  charges  and  credits  are  entered.  (2) 
Any  account  not  periodically  balanced. 

Open  Policy.  A  policy  of  insurance  covering  risks  that  are 
undetermined  at  the  time  of  issue,  but  that  may  be  entered  on 
the  policy  later. 

Order  of  Accounts  in  a  Ledger.    Prin.  72  B. 

Order  Book.    Form  14  C. 

Order  Sheet.    Form  14  B. 

Ordinary  Business  Profit.     Prin.  48. 


184  INDEX^COMMENTARY 

Ordinary  Interest  Method.     See  Interest. 

Organization.  Different  forces  brought  into  corresponding  re- 
lation to  accomplish  a  given  end.  A  business  organization  is  the 
sum  of  its  combined  management  and  capital  brought  together  to 
effect  a  business  purpose. 

Ordinary-  Business  Profit.     Prin.  47. 

Original  Entries.    Prin.  71-71  H. 

Outlawed  Claim.  A  claim  against  a  debtor  who  may  avoid 
it  in  law  on  account  of  the  time  it  has  remained  uncollected. 
"Statutes  of  Limitation"  prescribe  the  time  within  which  suit  may 
be  begun.  The  time  varies  in  different  states. 

Outstanding.     Referring  to  liabilities  unpaid. 

Overhead  Expense.    Prin.  47 ;  account  of,  Prin.  57. 

Packages,     (pkg.) 

Paid,     (pd.) 

Pails,     (pi.) 

Pair,     (pr.) 

Par.  Equality  between  nominal  and  commercial  value. 
Stocks,  bonds,  drafts,  etc.,  are  above  par  when  they  sell  at  more 
than  face,  and  below  par,  when  at  less  than  face. 

Part,     (pt.) 

Partnership.  An  association  of  persons  who  unite  property 
or  services  in  business.  Prin.  68  G. 

Party.  One  of  the  participators  in  a  transaction  or  exchange 
of  values.  An  individual,  partnership  or  corporation  may  be  a 
"party"  to  a  transaction. 

Pass  Book.  A  customer's  book  in  which,  on  presentation,  a 
trader  or  banker  enters  current  charges  or  credits. 

Patent.  A  document  issued  by  the  government,  securing  to 
an  inventor  the  exclusive  right  to  manufacture  and  sell  his  in- 
vention for  a  given  period  of  time  (fourteen  years  in  the  United 
States). 

Patent  Rights  Account.  Prin.  29  E;  how  written  off,  Prin. 
58  C. 

Patterns  and  Drawings.    How  written  off,  Prin.  58  C. 

Pawn.  To  transfer  possession  of  personal  properly  us  se- 
curity for  the  re-payment  of  money,  delivered  to  the  owner  by  the 
pawnbroker. 

Pawnbroker.  A  money  lender  whose  loans  are  secured  by  the 
borrower  pledging  <»r  "pawning"  personal  property  as  security,  the 
pledge  I.eini:  ..n  <•(, million  of  forfeiture  of  ownership  in  the  prop 
eri\  if  payment  is  not  made  according  to  the  agreed  terms. 

Payee.     The  person    nai 1     in    commercial    paper  to  receive 

payment 

Personal   Property.     Chattels,  merchandise,   conn Mtie-,  ami 

material,  as  opposed  to  real  property. 

Person.  This  term  is  used  in  a  business  sense  to  include 
either  .-in  individual,  firm,  association,  or  corporation. 

Personal   Account.     Of   customer.    Form    ll'II.    1ML:    of   <-red 
it..r.   Form   Ili  <i.  13  K. 

Per  Centum.     (%) 

I VI ty  Expense  Book.     (P.  E.  B.)     Prin.  74  E. 

Pieces.     (PS.  i 


INDEX-COMMENTARY  185 

Posting.  The  process  of  transferring  charges  and  credits 
from  first  entries  to  ledger  accounts.  See  Prin.  72  J. 

Pound.     (lb.),  also   (#)  when  placed  after. 

Power  of  Attorney.  The  power  given  by  one  person  to  an- 
other, authorizing  the  latter  to  make  specified  contracts  in  the 
name  of  the  former. 

Preferred  Stock.  (Pref.  Stock.)  The  stock  of  a  corporation 
which  is  entitled  to  dividends  before,  or  regardless  of,  the  common 
stock. 

Premium.  (1)  The  amount  above  par  paid  for  commercial 
paper.  (2)  The  amount  paid  for  insurance.  How  written  off. 
Prin.  58  C. 

President.     (Pres.) 

Primary  Accounts.  Accounts  which  are  carried  to  more  gen- 
eral accounts  at  intervals;  thus,  Merchandise  Bought  and  Mer- 
chandise Sold  accounts  are  carried  to  a  Trading  account. 

Primary  Books.     Prin.  78. 

Principal.  (1)  The  person  employing  an  agent.  (2)  The  sum 
upon  which  interest  is  computed. 

Processes  of  Bookkeeping.    Recapit,  Prin.  1-10. 

Producer.  One  who  grows,  buys,  manufactures,  or  otherwise 
prepares  a  utility  for  sale.  Farmers,  manufacturers,  merchants, 
bankers,  and  professional  people  are  producers.  The  utility  which 
they  offer  for  sale  is  called  their  product. 

Profit  and  Loss   (Nominal)  Accounts.    Prin.  51-60. 

Profit  and  Loss  Account.  (P.  &  L.)  Prin.  59;  Form  10  O, 
12  V,  14  I. 

Profit  and  Loss  Statement.  Prin.  41  to  50;  Forms,  Produc- 
tion business,  Prin.  50  B ;  Manufacturing  business,  Prin.  50  C ; 
Service  business,  Prin.  50  D ;  Trading  business,  Prin.  50  E ;  House- 
hold or  domestic,  Prin.  50  F ;  Financial  business,  Prin.  50  G. 

Profit.  The  money  gained  from  business  or  occupation.  Prin. 
41  B. 

Proof  Sheet.     Prin.  72  L;   Form  121. 

Property.  Things  that  a  person  may  own  or  dispose  of, 
whether  material  or  immaterial. 

Property  Accounts.     Prin.  27. 

Protest.  A  formal  act  of  a  notary  public  declaring .  certain 
paper  dishonored  by  the  payers,  and  holding  the  parties  to  the 
paper  liable. 

Proximo,     (prox.)     In  the  next  following  month. 

Purchase  Account.    Prin.  53  B. 

Purchases  Account.    Prin.  53  B. 

Purchase  Book.  (P.  B.),  and  Records.  Prin.  76  to  76 C;  or- 
dinary, Prin.  76  B  ;  for  extensive  business,  Prin.  76  C  ;  Form  13  D. 

Purchase  Ledger  Account.     Prin.  31  D. 

Purchase  of  Land.     Prin.  68  D. 

Quick  Assets.    Prin.  25. 

Quotations.  The  published  price  of  merchandise  or  commodi- 
ties, freight  or  exchange  rates,  etc. 

Railway.     (Ry.) 

Rating.  The  report  of  a  commercial  agency  on  the  financial 
standing  and  credit  of  a  person. 


186  INDEX-COMMENTARY 

Reading  Journal  Entries.    Prin.  71  R. 

Readjustment  of  Financial  Accounts  at  Closing.  Prin.  72  Q 
to  72  R. 

Real  Accounts.  Accounts  that  show  the  cash  value  of  collect- 
ible claims  against  orders  and  property  owned,  also  the  liabilities. 
Prin.  21. 

Real  Estate.  Property  in  houses,  lands,  and  attachments 
legally  pertaining  thereto. 

Real  Estate  Account.    Prin.  28 ;  Form  11 D. 

Rebate.    A  deduction  from  an  amount  assumed  to  be  due. 

Reading  Amounts.    Prin.  71  R. 

Receipt.  (Rect.)  A  written  acknowledgment  of  money  or 
value  received  from  another. 

Receiver.  One  appointed  by  a  court  to  hold  in  trust,  disputed 
or  unsettled  property  or  claims. 

Reconcile  Bank  Statement.    Prin.  64  B. 

Rent.  Money  or  goods  transferable  from  tenant  to  landlord 
in  payment  for  use  of  property. 

Reserves.  Prin.  36;  for  depreciation,  Prin.  36  B;  for  doubt- 
ful accounts,  Prin.  36  C;  general,  Prin.  36 D;  surplus,  Prin.  36 E. 

Resources.    Prin.  12. 

Revenue.  Prin.  41  B;  Service,  Prin.  44;  Trading,  Prin.  42; 
Manufacturing,  Prin.  43. 

Revenue  Accounts.    Prin.  52 ;  Form  10  I  and  10  M. 

Route.  (1)  The  railroad  or  carrier  to  which  shipments  are 
intrusted.  (2)  To  route  a  shipment  is  to  designate  carriers  and 
the  points  where  interline  shipments  are  transferred  from  one 
carrier  to  another.  (3)  To  route  a  job  through  a  factory  is  to 
itemize,  in  their  order,  the  various  materials  and  operations  from 
start  to  finish. 

Ruling.    Prin.  71  H. 

Rules  for  Charge  and  Credit.  Prin.  71 L  to  71 P;  general 
rules,  Prin.  71  Q. 

Sale  of  Goods.    Prin.  68  B. 

Sales  Account.    Prin.  53  B. 

Sales  Records.    Prin.  75  to  75  E. 

Savings  Fund  Account.    Form  10  C. 

Scale  Ticket.    Form  14  A. 

Schedule.     Prin.  18 ;  Forms  4  F,  4  ft.  4  H. 

Seal.  The  impression  or  mark  on  a  document  made  by  the 
signer,  additional  to  his  signature,  as  evidence  of  his  deliberate 
authorization  of  its  terms. 

Among  the  Saxons  and  other  curly  iionplo.  who  generally 
could  not  write,  legal  instruments  renuiwl  M  seal  instr.-id  ..|  si- 
nature.  The  requirement  of  a  seal  on  certain  instruments  became 
a  matter  of  law,  and  so  continued.  The  word  "seal"  or  "L.  S."  in 
Closed  in  M  cirelp,  or  in  hrackc-t  ;.  is  rre.|Heii11y  u-<ed  on  documents, 
and  constitutes  a  seal. 

>»-rret  Reserve.    Prin.  64. 

SHling  Expense.     Prin.  40:  Account  of.  Prin.  56. 

service  Business.  A  business  that  sells  prindpally  services 
rather  than  . •oimnodit ies :  us  a  dray  line,  railroad,  hotel,  liirbt. 
heat  and  power  eompany.  etc. 


INDEX-COMMENTARY  187 

Service  Revenue.    Prin.  44. 

Shares  of  Stock.    Prin.  30  B. 

Shipment.     (Shipt.)     The  goods  shipped. 

Short  Extend.  To  enter  or  carry  an  amount  short  of,  or  be- 
fore, the  money  column. 

Sight  Draft,     (st.  drl) 

Signature.    Prin.  SOB. 

Sinking  Fund.  Money  set  apart,  in  savings  or  investment,  to 
meet  a  future  maturing  debt. 

Single  Entry.  A  system  of  bookkeeping  wherein  entries  of 
transactions  do  not  require  equal  charges  and  credits  for  every 
exchange.  Prin.  69-69  E. 

Single  Page  Cash  Book.    Prin.  740. 

Single  Entry  Changed  to  Double  Entry.    Prin.  69  F. 

Silent  Partner.  A  business  partner  who  is  not  actively  en- 
gaged in  the  business,  but  whose  investment  entitles  him  to  share 
in  profits. 

Sold  Book  ( S.  B. )  and  Sales  Records.  Ordinary,  Prin.  75  B ; 
Duplicate,  Prin.  75  C;  Retail  Shop  Sale  System,  Prin.  75  D; 
Wholesale  Sale  System,  Prin.  75 E;  Form  130. 

Solvency.  Ability  to  meet  obligations.  A  business  is  solvent 
when  it  has  assets  sufficient  to  meet  its  liabilities. 

Space  for  Ledger  Accounts.    Prin.  72  I. 

Special  Column  Cash  Book.    Prin.  74  H. 

Special  Income  and  Expense.    Prin.  46. 

Special  Journal.    Prin.  73  E. 

Speculation.  Purchase  of  laud,  goods  or  securities,  with  a 
view  to  selling  them  at  a  rise  in  market  price,  as  distinguished 
from  trading,  wherein  goods  are  bought  to  supply  regular  retail  or 
wholesale  demands.  Prin.  55  C. 

Speculative  Accounts.    Prin.  30. 

Statement.  (1)  A  written  exhibit  of  the  condition  or  statis- 
tics of  a  business  organization.  Prin.  10.  (2)  A  written  exhibit 
of  the  doings  of  an  agent.  (3)  A  written  exhibit  of  the  current 
dealings  between  persons. 

Stocks.  The  shares  in  the  capital  of  a  stock  company  or 
corporation. 

Stock  Ledger.  A  subsidiary  or  memorandum  ledger  having 
the  stock  accounts  of  all  stockholders.  The  total  credits  of  this 
book  equal  the  paid  up  capital  stock.  Prin.  39  D. 

Stocks  Account.    Prin.  30  B. 

Stock  Exchange.  An  association  for  the  purchase  and  sale  of 
stocks  and  other  securities. 

Stock  Dividend.  Profits  of  a  business  which  have  been  added 
to  the  capital,  and  distributed  to  stockholders  in  the  form  of  ad- 
ditional shares  of  stock,  instead  of  in  cash. 

Stockholder.  One  who  owns  shares  of  the  capital  stock  of  a 
corporation  or  stock  company. 

Storage.  A  charge  made  for  keeping  the  goods  of  another  in 
a  warehouse. 

Stub.  The  memorandum  portion  of  a  check,  receipt,  note, 
draft  or  other  paper  which  remains  after  the  paper  is  detached 
and  delivered. 


188  I  \DEX-( '( JMMKXTARY 

Subscriber.  One  who  signs  his  name  to  an  agreement.  The 
subscriber  to  capital  stock  of  a  corporation  agrees  in  writing  to 
invest  a  given  amount  toward  the  capital  of  the  company. 

Subsidiary  Ledger.     Prin.  25  E;  72  C. 

Subsidy.  A  grant  or  bonus  by  government  or  a  municipality 
to  a  person  to  assist  him  in  the  establishment  of  an  enterprise 
deemed  advantageous  to  the  public. 

Sundry.  (Sund.)  More  than  one  or  two.  Various.  Very 
frequently  used  in  bookkeeping  referring  to  a  number  of  accounts 
later  enumerated  as  "Sundry  Accounts;"  also  referring  to  a  num- 
ber of  items  not  necessary  to  enumerate  as  "Sundry  Expenses." 
Used  as  a  heading  for  miscellaneous  items,  as  a  "Sundry  Column." 

Sundry  Accounts  Receivable.    Prin.  25  C. 

Superintendent.     ( Supt. ) 

Surplus  Account.     Prin.   36    E. 

Suspense  Account.  An  account  in  which  items,  whose  final 
disposition  is  doubtful,  may  be  charged  or  credited  while  awaiting 
final  disposition. 

Syndicate.  An  association  of  capitalists  formed  to  supply 
capital  for  some  financial  undertaking. 

Tare.  A  deduction  of  the  weight  of  containers  from  the  gross 
weight. 

Taxable  Income.    Prin.  68  K. 

Teller.  (Tel.)  A  bank  clerk  who  counts  money  paid  to  or 
received  from  customers. 

Tender.  The  offer  of  payment  or  satisfaction  of  a  demand. 
usually  the  offer  of  legal  money,  called  a  legal  tender,  for  the  pay- 
ment of  a  debt. 

Terms  of  Sale.  The  conditions  governing  the  settlement  for 
property  sold. 

Theory  of  Charge  and  Credit.    Prin.  71  1-71  R. 

Tickler.  A  book  arranged  to  show  future  due  paper  or  other 
import  a  ni  data  in  the  order  of  the  dates  when  attention  should 
he  given  to  them. 

Title.    The  heading  of  an  account.     Prin.  8. 

Ton  or  Tons.     (T.) 

Tools  Account.     How  written  off,  Prin.  58  C. 

Trade  Discount.  A  discount  from  certain  list  prices,  or  from 
the  amount  of  purchases,  made  to  a  dealer  on  account  of  a  change 
in  the  price,  or  to  regulate  the  dealer's  profit. 

Trade  Mark.  A  device  placed  upon  manufactured  goods  to 
•  li-tiiiiruisli  tin-in  from  imitations.  Trade  marks  arc  copyriirlite  I 
to  in-urc  their  exclusive  use  l.y  the  owner. 

Trade  Creditors  Account.    Prin.  31  D. 

Trading  Account.     Prin.  53;  Form   12  S,  14  .T. 

Trading  Business.  The  bnsinc«  ..r  buying  ami  selling  com- 
modities A  mercantile  business. 

Trading  Revenues.     Prin.  42. 

Trading  Statement.     Prin.  42:  Form  12  N.  i:1,  K. 

Transactions.     Prin.  3. 

Transit.  Checks  or  drafts  are  snid  to  l>e  "in  transit"  when 
they  are  held  l.y  parties  between  drawer  and  drawee. 

Treasurer.     iTrens.) 


INDEX-COMMENTARY  IS!) 

Treasury  Stock.  The  stock  of  a  corporation  which  is  received, 
bought  or  donated  back  after  having  once  been  issued.  Such  stock 
Is  carried  in  a  special  account,  entitled  "Treasury  Stock." 

Trial  Balance.     Prin:  72  M ;  Form  10  G,  10  P,  12  J,  12  K. 

Trust  Company.  A  financial  institution  that  takes  charge  of 
the  financial  investments  of  persons  or  estates,  and  carries  on  a 
banking  business  in  greater  or  less  degree,  depending  on  state 
laws. 

Trustee.  A  person  who  holds  legal  title  to  property  for  the 
benefit  of  others. 

Two-Page  Cash  Book.    Prin.  74  C. 

Ultimo,  (ult.)  In  the  month  just  preceding  the  present 
month. 

Unclassified  Profits  and  Losses.    Prin.  58. 

Undivided  Profits  Account.     Prin.  36  F. 

Unsubscribed  Stock  Account.  The  account  charged  for  the 
portion  of  the  capital  stock  account  of  a  corporation  which  has 
not  been  apportioned  to  any  subscriber  or  stockholder. 

Utility.  A  salable  property  or  benefit ;  as,  commodities,  serv- 
ices, uses,  or  conditions  of  time  or  place  that  may  be  given  for  a 
price.  The  utility  sold  by  a  grocer  consists  of  groceries;  that  of 
a  railroad,  transportation ;  that  of  an  electric  light  company, 
light  or  power;  that  of  a  teacher,  instruction;  that  of  a  lawyer, 
advice  or  service. 

Verifying  the  Posting.    Prin.  72  K. 

Vouchers.  The  written  evidence  of  business  transactions. 
The  most  usual  are  receipts  for  money  paid  or  orders  for  goods 
sent. 

Vouchers  Payable.    Prin.  31  D. 

Voucher  System.     Prin.  76  D. 

Way  Bill.  A  form  accompanying  .freight  shipments  to  show 
the  routing  and  disposition. 

Wholesale.     Sale  in  quantity  suitable  for  division  by  retailers. 

Yards,     (yd.) 


YB   18627 


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M513301 


